VZCZCXRO6052
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0489/01 1601540
ZNR UUUUU ZZH
R 091540Z JUN 09 ZDK ZDK ZDK
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1348
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000489 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: Serbia: First Quarter 2009 Results - Crisis Continues, 
Government Optimistic 
 
BELGRADE 00000489  001.2 OF 002 
 
 
 
Summary 
------- 
 
¶1.  (SBU) Serbia's first quarter 2009 macroeconomic figures show 
further economic deterioration.  However, with his usual economic 
optimism Deputy Prime Minister Dinkic claimed that Serbia had passed 
the low point of the crisis and would see "better and better news." 
Positive signs included the stock exchange indices, which climbed in 
April and May while the number of blocked accounts of companies held 
steady.  With an estimated first quarter GDP growth rate of minus 
5.2% National Bank Governor Jelasic said that Serbia had avoided the 
worst of the crisis, but the question remained when there would be 
light at the end of tunnel.  Fiscal revenues were down by 16% from 
the same time last year and the budget gap has widened beyond what 
was agreed with the IMF, making another budget rebalance almost 
certain.  End Summary. 
 
 
Production Down, Prices Up, Dinkic Optimistic 
--------------------------------------------- 
 
¶2.  (SBU) Serbia's industrial production decreased by 16.9% in the 
first quarter (Q1) of 2009 year on year (y/y).  Production further 
fell in April to 21.1% y/y, but Stojan Stamenkovic of the Economic 
Institute said that the fall was caused by warm weather in April 
(reducing electricity production), and a temporary halt in oil 
derivatives production; and thus the actual drop was 17%.   The 
largest decline was in the production of basic metals, chemicals, 
motor vehicles, and furniture.  However, eternally optimistic Deputy 
Prime Minister and Economy Minister Dinkic said on May 13 that the 
results started to improve in March- the drop of industrial 
production in March was 14% y/y - and that Serbia reached the bottom 
of the crisis in February.  National Bank Governor Radovan Jelasic 
said on May 25 that Serbia avoided the worst of the crisis.  Bosko 
Zivkovic, Economic Faculty banking expert stated on June 2 that the 
crisis was slowly easing. 
 
 
Blocked Accounts Number Steady, Stock Indices on Rise 
--------------------------------------------- -------- 
 
¶3.  (SBU) A positive signal, according to Economic Analysis and 
Research Director at the National Bank of Serbia (NBS) Branko Hinic 
on May 28, was that the number of companies whose accounts were 
blocked due to illiquidity has been steady since the beginning of 
May, unlike the previous months when it was constantly increasing. 
In line with the official optimism, the Belgrade Stock Exchange 
Belex15 index, which had been declining for almost a year, started 
to recover in April and May, climbing back to its January 2009 
level. 
 
 
GDP Growth Rate of Minus 5.2% in Q1 
---------------------------------------- 
 
¶4.  (SBU) According to the NBS's May 2009 inflation report, Serbia's 
GDP growth was minus 5.2% in the Q1 2009 y/y mostly due to the drop 
in industrial production (17%) but also due to a drop in trade 
(14%).  First quarter retail turnover also decreased by 15.4% y/y. 
The drop in retail demand, as Hinic explained, came from hesitation 
about borrowing (in December 2008 real annual growth rate of 
consumer loans was 11.8% while in March it was only 3.3%).  NBS 
analysts also expected that unemployment would grow in the near 
future since companies would be less interested in hiring. 
 
 
Foreign Trade Shrank By Over a Third 
------------------------------------ 
 
¶5.  (SBU) Serbia's foreign trade continued to shrink in early 2009 
with the global crisis, a decrease in the prices of basic 
commodities which are the bulk of Serbian exports, and the drop in 
industrial production.  Exports in January-April 2009 shrank by 35% 
y/y to $2.27 billion whil%:Qp\Qyrimary trade partners 
remain Bosnia-Herzegovina as the top export destination for Serbian 
goods followed by Germany and Italy.  Russia is the number one 
source of imports.  Despite the crisis, Serbia maintained a trade 
surplus with CEFTA countries mostly thanks to strong exports of 
agriculture products. 
 
 
Everything Sinking But Inflation 
-------------------------------- 
 
BELGRADE 00000489  002.2 OF 002 
 
 
 
¶6.  (SBU) Unlike in other countries, where the drop in production 
and/or demand has cut inflation, retail prices in Serbia in May were 
up 10.4% y/y and 8.7% since the beginning of 2009.  Nearly 
two-thirds of the increase resulted from increases in government 
controlled prices.  However, the NBS expects inflation to slow down 
and has targeted 8.8% inflation for 2009.  Hinic noted that NBS cut 
the main interest rate slightly from 16.5% in January to 14% in May, 
but said that it was likely the rate would decrease in the near 
future.  On June 8 NBS made an additional small cut in the rate from 
14% to 13%. 
 
 
Banks: Liquidity Questions 
-------------------------- 
 
¶7.  (SBU) Hinic complained that the decrease in the main interest 
rate did not transfer into lowering banks' lending rates.  Overall 
bank loans at the end of Q1 were only 1.1% higher than at the end of 
2008, a significant slowdown in credit growth.  At the same time, in 
the first four months 2009 net cross border borrowing was negative - 
companies returned $188 million to foreign banks, exactly what NBS 
tried and hoped to stop via the voluntary agreement in Vienna with 
international banks.  Net FDI in Q1 reached $836 million, mostly due 
to revenue from the sale of oil firm NIS to Gazprom for $520 
million. 
 
¶8.  (SBU) The foregn exchange market returned to stability in 
March.  The Serbian dinar nominally depreciated against the Euro by 
9.6% in Q1.  The NBS has not intervened in the market since February 
¶26.  Hard currency reserves went down from $13 billion at the end of 
2008 to $11.5 billion end of April 2009.  Citizens slowly regained 
trust in the banking sector and increased savings in banks by $124 
million in Q1 to reach $6.37 billion at the end of March. 
 
MFIN Headache: Q1 Fiscal Revenues Down by 16% y/y 
--------------------------------------------- ---- 
 
¶9.  (SBU)  As a result of the fall in production and GDP, budget 
revenues in Q1 fell by $171 million y/y or by 16% in real terms; 
thus becoming a real headache for the government.  Tax revenues were 
down by $110 million or by 14% in real terms, with the biggest drop 
recorded in VAT collection (-13%), customs (-30%), corporate profit 
tax (-25%), income tax (-5%), and excise tax (-6%).  Non-tax 
revenues were down by 40%.  Compared to the 2009 budget revenue 
projection the first four months revenues were nominally 13% below 
the 2009 projection.  On the other hand current budget expenditures 
recorded a 14.5% nominal increase and reached $2.21 billion in Q1 
¶2009.  The bulk of the increase resulted from an increase in pension 
transfers, and capital expenditures.  Compared to 2009 projections 
expenditures through April were nominally 9.5% below projected 
expenditures.  The government deficit was $163 million for Q1 2009, 
with total revenues of $2.13 billion and total expenditures of $2.29 
billion.  Recognizing the difficulties, Finance Minister Dijana 
Dragutinovic said on May 29 that the government might ask the IMF in 
August to allow the budget deficit cap to widen to 4% of GDP from 
the current 3% under the Stand-By Arrangement. 
 
COMMENT 
-------- 
 
¶10.  (SBU) Serbia managed to survive the first quarter without 
significant damage to the financial system.  The 2008 IMF 
Precautionary Program and the follow-on $4 billion Stand-By 
Arrangement which was approved in May have helped stabilize and 
reassure markets.  However, once summer is over there will likely be 
renewed macroeconomic pressure on the government.  Government 
measures that subsidized interest for bank loans increased 
liquidity, but have not stopped the continuing fall in production as 
orders dry up.  The government continues to struggle with its own 
debts to suppliers, and has asked for Parliament approval to 
guarantee commercial bank loans to settle half of the $440 million 
debt owed by Serbia's state road company.  The pressure is still on 
the government to come up with a plan to deal with the continued 
economic slow down this fall. 
 
BRUSH