FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
BELGRADE STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Events in the 2006 have highlighted the
fragility of the ruling minority coalition in
Serbia, led by the Democratic Party of Serbia
DSS. The government will be confronted by a
series of potentially divisive issues, and Serbia
is likely to face a general election before the
next scheduled poll at the end of 2007.
Montenegro has declared independence
following a referendum on May 21st 2006.
It was a psychological blow for Serbia's ruling
minority coalition and for the DSS leader and
prime minister, Vojislav Kostunica, who had
been a strong supporter of the state union.
Serbia has accepted the referendum result,
but negotiations on issues arising from
the break-up could take several months.
Membership of international organizations
has passed automatically to Serbia under the
2003 Constitutional Charter. Economic Performance
The completion of the IMF's three-year
arrangement with Serbia and Montenegro in
February 2006 triggered the remainder of the
debt write-off agreed with the Paris Club in
2001. Strong inflows of foreign direct
investment (FDI) and high levels of foreign
exchange reserves in Serbia have reduced
dependence on external assistance. However,
multilateral lenders and foreign investors
remain concerned about the level and
structure of public spending, the size of
public-sector wage increases, and the
continued presence of large, unreformed
state-owned enterprises (SOEs). Forecast is
that Serbia will negotiate fresh agreements
with the IMF in the near future. Fiscal and
monetary policies are expected to remain
tight, with the authorities coming under
pressure to speed up privatization.
The government faces several difficult issues:
talks on Kosovo's future status and the EU's
demand that it transfer the former Bosnian
Serb military commander, Ratko Mladiç, to the
International Criminal Tribunal for former
Yugoslavia (ICTY) in The Hague. The break-up
of the state union is unlikely to delay or
disrupt the SAA talks significantly, since the
EU had already been negotiating separately
with Serbia and Montenegro. The EU called
off the latest round of talks, scheduled for
May 11th, after Serbia failed to hand over
Mr. Mladiç by the EU's April 30th deadline, but
it has left open the possibility that negotiations
will be speedily resumed should Serbia be
seen to be co-operating fully with the ICTY. Real GDP in Serbia grew by 6.3% year on
year in the first quarter of 2006, driven by a
manufacturing recovery and continued rapid
expansion of trade, financial services, and
transport and communications. In view of
Serbia's strong first-quarter performance
forecast for real GDP growth in 2006 has risen
to 6% (from 5% previously). Key drivers will
include continued investment in newly
privatized companies; relatively robust
consumer demand, driven by continued real
wage growth and the expansion of
commercial bank lending; and an increase in
public investment. An acceleration of real
GDP growth in the euro zone is expected in
2006, to 2%. Domestic demand in the euro
area will continue to be weak, constraining
export growth for Serbia, which conducts
about half of its foreign trade with the EU.
The current account deficit will remain large,
Key Information Contacts
Securities Commission of Montenegro www.scmn.cg.yu
Central Depositary Agency www.cda.cg.yu
Central Bank of Montenegro www.cb-cg.org
Ministry of Finance www.ministarstvo-finansija.cg.yu
Montenegro Statistical Office www.monstat.cg.yu
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at an average of more than 9% of GDP in
2006-07. Inflation is forecast to fall to 12.5%
by the end of 2006, as fiscal and monetary
policies are kept tight and the public sector
undergoes further restructuring, followed by a
further slowdown in inflation in 2007, to about
10%.
The Serbian authorities are currently aiming
to limit the dinar's nominal depreciation
against the euro in order to reduce inflationary
pressures and contain external debt-servicing
costs. This policy carries risks, since it could
endanger Serbia's external competitiveness,
and the IMF is urging the authorities to
restructure and privatise SOEs, and to
improve the investment climate.
The US dollar trade gap on the balance of
payments fell considerably in 2005, reflecting
strong Serbian export growth–itself partly
explained by underreporting in the period,
before the introduction of value-added tax.
The current account deficit for the common
state is estimated at 8.8% of GDP in 2005,
down from 12.5% in 2004. Enterprise
restructuring, privatization and other supply-
side reforms should make exporters more
competitive, despite the expected real
effective appreciation of the dinar. Strong
consumer demand and high international oil
prices in 2006-07 will put upward pressure on
import bills. It is expected the US dollar trade
gap to widen, anticipating current account
deficits in Serbia of 9.5% of GDP in 2006 and
8.7% in 2007.
* The Economist Intelligence Unit Ltd., July 2006.