VZCZCXRO9276
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0184/01 0631353
ZNR UUUUU ZZH
R 041353Z MAR 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1024
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000184 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV SR
SUBJECT: Serbia: January Economic Data Highlights Sharp Downturn 
 
SUMMARY 
------- 
 
¶1. (SBU) Newly released data from January showed the sharp downturn 
in the Serbian economy as the financial crisis affected the 
currency, trade, and production.  While layoffs have not yet made 
headlines in Serbia, the data show that Serbia is not insulated from 
the global crisis and the government's public messages are 
increasingly sober about the challenges that the country will face. 
The full effects of the crisis are yet to come, but the 17% decline 
in industrial production in January, and the nearly 38% decline in 
imports, opened what will be a difficult year.  The continued fall 
of the dinar challenges banks, businesses and consumers to forecast 
their costs.  End Summary. 
 
Economic Activity Slows Sharply as 2009 Opens 
--------------------------------------------- 
 
¶2. (U) Economic data released in the last several days demonstrates 
the sharp decline in economic activity in Serbia.  Industrial 
production in January 2009 was down 17% from 2008.  The Serbian 
government pointed to the Russia-Ukraine gas crisis as a significant 
contributor to the decreased economic activity, but clearly the 
economic crisis is hitting Serbia's real economy.  At the same time, 
inflation in January was 2.3% with an annualized rate of 10.7%. 
Increases in government-controlled prices, including public 
transportation, contributed to inflation even as market prices for 
some food products declined with decreased international demand. 
 
¶3. (U) Serbia's exports in January 2009 fell 24% from January 2008 
levels to $480 million.  At the same time imports fell by an even 
larger percentage, 37.5%, to $850 million.  The one positive aspect 
of these declines was the relatively larger fall in imports, which 
reduced Serbia's trade deficit by almost 50%.  Also, Serbia's trade 
with its Central European Free Trade Agreement (CEFTA) partners 
remained in surplus thanks to food products exports to the region. 
 
 
Dinar Fall Continues 
-------------------- 
 
¶4. (U) Pressure on the dinar continues despite the $1.9 billion in 
reserves that the National Bank of Serbia (NBS) has spent since 
October to manage the decline of the dinar.  The pressures of 
continued inflation driven by reduced state subsidies in energy and 
public transportation prices, combined with the fall of the dinar, 
limit the NBS's flexibility to cut domestic interest rates.  The NBS 
maintained the reference interest rate at 16.5%, which increased the 
cost of borrowing in dinars for businesses and often left 
cross-border borrowing in euros as the only cost competitive 
alternative for new borrowing for companies strong enough to qualify 
for credit.  The continued cost-driven pressure to secure credit in 
euros perpetuates the currency risk to the Serbian economy and makes 
it more difficult for banks to adequately assess the risk of their 
loan portfolio. 
 
¶5. (SBU) As the crisis deepens, the dinar nears the psychologically 
significant barrier of 100 dinars/euro.  On March 2 Deputy Prime 
Minister Djelic told us that at a March 1 meeting of the Democratic 
Party leadership, the party agreed that the government could not 
allow the dinar to sink past 100 dinar/euro.   Unfortunately, the 
government has limited tools to influence the exchange rate and the 
NBS is reaching the limit of the reserves that it can spend managing 
the decline of the dinar's value.  At a February 26 seminar 
organized by the American Chamber of Commerce (AMCHAM), Bosko 
Zivkovic, a member of the Prime Minister's economic advisor team, 
said that the NBS was nearing the limit of reserve spending to 
manage the dinar's decline and that a new paradigm for foreign 
exchange stabilization was needed. 
 
Banks and Businesses Buckle Down 
-------------------------------- 
 
¶5. (U) While the Serbian banking system is under pressure and banks 
are seeing repayment problems grow for debtors across the spectrum 
of risk, the banking system is not under threat.  Bank profits in 
2008, even with the clear beginnings of the downturn in the fourth 
quarter, were strong and capital adequacy ratios remained at 23% in 
2008, according to Raiffeissen's Deputy Chairman Zoran Petrovic. 
Erste and Raiffeissen both announced 2008 results recently and 
recorded record profits. 
 
¶7. (U) The sharp drop in industrial production and the rapid decline 
in imports highlight the crisis's effect on business activity in 
Serbia.  Board members from both the Foreign Investors Council (FIC) 
and the AMCHAM made public statements in the past week that member 
companies remained committed to Serbia, but that the crisis would 
reduce or postpone investment plans. 
 
 
BELGRADE 00000184  002 OF 002 
 
 
Comment 
------- 
 
¶8. (SBU) This week nearly all of the Serbian economic leadership - 
government, business and academic -- is at the Serbian Economists 
Association's annual business conference.  While the conference is 
traditionally the most significant economic discussion in the 
country, with the press referring to it as "Serbia's Davos," this 
year's discussion has started out with a very sober tone about the 
challenges to come.  Serbia's brightest economic minds will be 
challenged to come up with a cohesive vision to lead the country 
through the coming months.  The government's options are limited, 
but as the January economic data demonstrates, there is no more talk 
that Serbia can isolate itself from the pressures of the global 
economy.  End Comment. 
 
BRUSH