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DE RUEHBW #0245/01 0820603
ZNR UUUUU ZZH
R 230603Z MAR 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1088
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 BELGRADE 000245 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV SR
SUBJECT: Serbia's "Davos" at Kopaonik Mountain 
 
REF: Belgrade 212 
 
SUMMARY 
------- 
 
¶1.  At the annual gathering of economists known as the "Serbian 
Davos" at the Kopaonik ski resort, government economic ministers 
accompanied by the President Tadic, openly voiced concerns over the 
worldwide crisis hitting Serbia.  In the course of the gathering, 
the government reached consensus on an expansive fiscal policy, a 
moderately restrictive monetary policy, and a stable exchange rate. 
Economists pressed for continuing reforms and anti-recession 
policies, while bankers asked for stable and not too high exchange 
rate, and businessmen criticized the government seeking more 
financial support during the crisis.  End Summary. 
 
Government, Tycoons, and Economic Experts Together 
--------------------------------------------- ----- 
 
¶2.  The 16th gathering of economists at the Kopaonik ski resort from 
March 3-5, 2009 called "Growth Under Conditions of Global Recession 
and Financial Crisis: (Non) Conventional Initiatives" for the first 
time attracted strong government participation.  President Tadic and 
Prime Minister Cvetkovic attended and listened to sessions during 
the first two days.  Ministers were unusually frank in raising their 
concerns about what the appropriate policy choices were for fiscal 
policy or supporting the exchange rate.  Also for the first time 
several of the most influential tycoons appeared at the gathering 
including Delta Holding owner Miroslav Miskovic, East Point owner 
Zoran Drakulic and MK Komerc owner Miodrag Kostic, who had just 
bought most of the Kopaonik resort facilities, including the 
premises where the event was held.  While government representatives 
"came to learn" as Tadic phrased it, and asked experts to be 
creative and help find solutions for the worldwide crisis that was 
about to hit Serbia, the tycoons came to lobby for their own 
interests, such as a stable exchange rate. 
 
Government Finally Concerned About the Crisis 
--------------------------------------------- 
 
¶3.  After months of unfounded optimism and hope that Serbia would 
avoid the crisis, the government and President Tadic admitted that 
Serbia would face the crisis this year and that nobody knew how long 
and how severe it would be.  Tadic characterized Serbia's economic 
reality as very difficult and asked all to think unconventionally 
about solutions.  Tadic said that everyone, including businesses, 
had to change their behavior since the crisis was a different 
experience where big businesses would earn less profits, SMEs would 
find less credit and ordinary people would face job losses. 
 
¶4.  Prime Minister Cvetkovic said that Serbs should be aware of the 
situation but still nurture some optimism.  Finance Minister 
Dragutinovic admitted that the crisis arrived much sooner than she 
had expected, while eternal optimist Economy Minister Dinkic warned 
that this would be a difficult year but Serbia could still avoid 
recession.  Deputy PM Djelic admitted that growth projections would 
be revised to zero, and that inflation would be higher than 
projected, but the government would try to keep it around 10%, and 
the $2.6 billion FDI projections for 2009 were unrealistic. 
Experts: Finish Reforms, Government: Bad Timing 
--------------------------------------------- -- 
 
¶5.  While government representatives highlighted that the Serbian 
financial system successfully survived a first blow from the crisis 
when citizens withdrew $1.3 billion (17%) of savings from banks in 
October-November 2008, economic experts assessed that the Serbian 
economy would face a more difficult situation than other countries 
due to Serbia's unfinished economic reforms and transition. 
President of the Association of Economists Dragan Djuricin 
characterized Serbia as a country in permanent transition.  Experts 
also called on the government to use the crisis as an 
opportunity/excuse to execute necessary reforms in the oversized 
public sector.  However, government ministers (Dinkic, Djelic, 
Dragutinovic) insisted that the crisis was not a good time to cut 
employees in the public sector or their salaries since it would 
decrease demand, further slow the economy, and would put additional 
people into an already collapsing job market.  Former Deputy PM 
Miroljub Labus called for a halt to the de-industrialization of 
Serbia as the share of industrial production in GDP dropped from 24% 
in 2001 to 18% in 2008. 
 
Only President Tadic Stood For Reforms 
-------------------------------------- 
 
¶6.  Surprisingly President Tadic admitted there were structural 
problems in the economy "we spent more than we earned."  Tadic 
called for deep reforms, both economic and social, since it was the 
only guarantee for a better future.  Tadic said Serbs must delink 
criminals, businesses, the judiciary and politics that had become 
 
BELGRADE 00000245  002 OF 003 
 
 
linked during the 90's (reftel).  Unfortunately, the economy was 
partially based on principles of criminality, and post-Milosevic 
reforms should have been radical, said Tadic. 
 
Government Consensus: Expansive Fiscal & Moderately Restrictive 
Monetary Policies 
--------------------------------------------- ---- 
 
¶7.  Government ministers agreed that 2009 budget deficit projection 
needed revision, from 1.75% to 3% of GDP, leaving a gap of around $2 
billion.  Finance Minister Dragutinovic revealed that 
January-February budget revenues were down by 5% nominally y/y, 
which together with increased expenditures y/y endangered budget 
liquidity.  Ministers agreed that the gap should be covered with 
external borrowing, mostly from IFIs and bilateral loans, 
accompanied by a new stand-by arrangement with the IMF.  However, 
Deputy PM Dinkic claimed that part of the money would have to be 
borrowed locally because it was faster than the lengthy procedures 
when borrowing abroad.  Pavle Petrovic of the Economic Faculty 
warned that this could drain out liquidity from already dry domestic 
market. 
 
National Bank Governor on the Opposite Side 
------------------------------------------- 
 
¶8.  Despite the consensus in the government on expansive fiscal and 
moderately restrictive monetary policy as DPM Dinkic phrased it, and 
a need for a stable exchange rate, NBS Governor Jelasic presented a 
lone counterpoint.  Jelasic said that Serbia must urgently cut 
consumption, increase revenues, withdraw approved funds from IFIs, 
identify additional funding sources and agree to a new IMF 
arrangement.  He added that Serbia had four alternatives to fill the 
current account gap: cut budget expenditures, increase taxes, borrow 
abroad, and continue privatization.  In the end, there would be a 
mixture of these measures.  He emphasized that the government must 
be proactive since whatever the government did not address would be 
reflected in the exchange rate and inflation.  He said that due to 
the still double-digit annual inflation interest rates had to remain 
high. 
 
Exchange Rate: Government & Tycoons versus Governor 
--------------------------------------------- ------ 
 
¶9.  Several discussions centered on the exchange rate with 
businessmen and bankers demanding a stable exchange rate.  Vladimir 
Cupic, Chairman of the Hypo Alpe Adria bank in Serbia, claimed that 
it was much cheaper to keep a stable exchange rate than let it go to 
120-130 dinars/euro since then people wouldn't be able to pay back 
credits, unemployment would increase, panic-driven demand for euros 
would increase, and that would put additional pressure on the 
exchange rate.  Tilo Berlin, Chairman of Hypo Alpe Bank 
International claimed that a 10% depreciation of the dinar resulted 
in $65 million losses for the bank due to increased non-performing 
loans.  Jelasic was alone defending a flexible market-driven 
exchange rate for the dinar.  He said the dinar's value was the 
result of economic policies and not a goal itself and that if one 
excluded adjustment of the economy via the exchange rate it would 
adjust (break) in some other way. 
 
Businessmen/Tycoons Criticize the Government 
-------------------------------------------- 
 
¶10.  The sharpest critics of the government came from 
businessman/tycoon - Nenad Popovic, vice president of the opposition 
DSS party, but also from former DSS member Zoran Drakulic (East 
Point Holdings), and from Miodrag Kostic (MK Commerce), a close 
friend of late Prime Minister Djindjic.  Popovic claimed that 
government had no strategy to combat the crisis, but only a number 
of unconnected measures.  Drakulic criticized the government's 
anti-crisis measures claiming they were insufficient, and 
subsidizing of Fiat car sales that provided limited benefits to 
Serbia instead of supporting wheat exports.  Kostic criticized the 
state for not providing enough money to support agriculture as 
Serbia's largest net export. 
 
Comment 
------- 
 
¶11.  The broad, high-level attendance at the Kopaonik conference 
from the government, tycoons and economic experts reflected the keen 
interest and concern in Serbia about the economy.  The event 
provided a forum for constructive discussion with the government, 
business and academics.  The isolation of Jelasic in defending the 
floating exchange rate highlighted the pressures he faces. 
President Tadic's participation reflected his increasing awareness 
that economic issues, not political issues, will be key to his 
ability to maintain political stability in the coming year and to 
build his legacy as a Serbian leader.  End Comment. 
 
 
BELGRADE 00000245  003 OF 003 
 
 
MUNTER