Serbia: Robust Q1 Performance Unlikely to Continue

Serbia: Robust Q1 Performance Unlikely to Continue

The Serbian economy performed well during the first quarter of 2020. Structural factors, such as a smaller dependence on tourism, as well as effective fiscal and monetary responses, have significantly alleviated contractionary pressures. However, guiding the economy throughout the rest of the year will be a more laborious endeavour. 

In the first quarter of 2020, the Serbian economy registered a growth of 5% year-on-year, the highest among 38 European economies. Germany’s gross domestic product (GDP), for example, shrank by 2.3% in the same period. Serbian Minister of Finance Sinisa Mali was quick to highlight this “achievement,” suggesting that Serbia should “get used to being the best in Europe.” So what explains Serbia’s economic performance, and what is the outlook for the rest of the year?

Statistical comparisons can be politicized

Statistical evidence can easily be manipulated. Indeed, Serbia’s GDP has increased compared to the first quarter of 2019 but a look at quarter-on-quarter growth paints a different picture. Serbia’s economy actually contracted by .6%, according to seasonally adjusted GDP data, compared to the fourth quarter of 2019. 

Moreover, drawing parallels between Serbia’s growth and that of European juggernauts such as Germany is fundamentally flawed. For example, a 5% expansion by Serbia reflects 2.5bn euro in value added. If Germany were to expand its economy by 0.5%, it would still be adding more value – close to 17bn euro to be precise. Of course, proportionality matters. But so do appropriate comparisons. 

Structure of the Serbian Economy

Indeed, Serbia’s contraction in the first quarter was milder in relation to other European countries. The French, German and Italian economies shrunk by 5.3, 2.2 and 5.3 %, respectively. But this has less to do with the government’s response, and more to do with the structure of the Serbian economy. 

Serbia is less reliant on the service sector, which has been hit particularly hard by the coronavirus. Most high-income nations are service-oriented economies. This speaks to the infancy of Serbia’s economic development. It is also more dependent on agriculture, which accounted for 6.3 % of GDP in 2018. By contrast, Germany’s agricultural sector contributed to less than 1 % of GDP. Demand for food is generally inelastic.

But Serbia’s reliance on manufacturing, which accounted for 14.5 % of its GDP in 2018, ensured an economic contraction. According to the Serbian Statistical Office, industrial production, compared to February 2020 (100%) slumped to 79.33 percent in March, 70.37 percent in April, then recovering to 83.85 % in May. However, production in May was still 8.8 % lower than the 2019 average. 

Since the EU is Serbia’s most important trading partner, exports took a hit. 24 percent of Serbian exports head to Germany and Italy, both of whom have experienced a decline in demand. The overall external trade for the period of January – June 2020 amounted to EUR 18,543.4 million, which was a decrease of 7.7 % compared to the same period in 2019. 

The Government Response

At the same time, the response of the Serbian government also played a crucial role in alleviating some of the contractionary pressures. It ran a surplus for the past few years, which allowed fiscal authorities to deploy a package worth 11% of GDP. For example, 100 euro payouts were given to all adult citizens, which boosted economic activity, and eased some of the disinflationary pressures. 

Other measures include: tax deferrals, wage subsidies, increased healthcare spending and a state guarantee scheme for bank loans to SMEs. These measures, alongside lower tax revenues, pushed the budget into a deficit, which is expected to pass 7-8 % of GDP this year.

The Central Bank also provided approximately 350mn dinars and 96mn euros in liquidity to the banking system through repo and swap operations, while also introducing a three month moratorium on bank loan repayments. The key policy rate was also cut by 100bp since January, to 1.25%. The currency has also remained stable, despite some downward pressure. To keep the EUR/RSD at 117.5, the Central Bank sold a net amount of 875mn euros, or 6.1 % of its total foreign reserves. 

The government also borrowed in international markets, issuing 2bn in euro-denominated debt at a 3.125% coupon rate. It matures in 2027. Hence, the ability to keep the dinar stable will be a priority for the central government. Serbia’s long term credit rating has improved in recent years. In December 2019, Standard and Poor’s increased Belgrade’s rating to BB+, its highest ever score. This reflects the growing stability of the macroeconomy, which has attracted investors searching for higher yields. 

Deflationary pressures have also been kept to a minimum. From the available data, inflation was negative .2% in May compared to April. Interestingly, unemployment remained unchanged between the fourth quarter of 2019 and the first quarter of 2020 – standing at 9.6%. Net salaries and wages began shrinking between March and May. However, the decline was minimal – from 59,681 RSD to 58, 892 RSD. 


The government has some fiscal space, with debt to GDP currently standing at 52.4%. Though not part of the EU, Serbian policy makers would like to keep debt below the Maastricht Treaty threshold of 60%. According to the latest reports, the government will cover 60% of the minimum wage in August and September, while also exempting workers from paying taxes and contributions on wages for one month. According to Finance Minister Mali, this will be paid for by increased government revenues, as opposed to more debt. 

Monetary policy is close to exhaustion. The key policy rate has already been significantly reduced – 100bp since January. Indeed, Serbian household debt is low compared to European standards, largely due to a high homeownership rate. But persistently low interest rates may place downward pressure on the Dinar, which is in a managed float regime. Currency stability is a priority, as the country has been looking to attract foreign investors

The National Bank of Serbia expects a V-shaped recovery after the second quarter, which it deems to be the peak of the crisis. This may be wishful thinking. Serbia relies on the EU for most of its trade and investments. And cases have been increasing across the continent, which will stifle the return of external demand and financial flows. 

Meanwhile, internally, Serbia’s strong first quarter results largely came down to strong private sector demand. But the latest wage-supporting schemes are not strong enough to replicate such activity. Instead, they are oriented towards maintaining employment and compensating for the cut-back in private spending. Short-term household savings have been consistently increasing since January. 

In essence, the government will now be looking to redirect its effort from boosting demand towards maintaining employment. A lot of fiscal and monetary ammunition was used in the first quarter, which partly explains the robust economic performance. As such, supporting the economy throughout the rest of the year will be a tougher matter, particularly if other European economies continue their downturns. 

Categories: Economics, Europe

About Author

Nemanja Popovic

Nemanja Popovic is currently pursuing an MSc in Political Economy at the University of Amsterdam, having done a Bachelors in History at the Erasmus University in Rotterdam. He is specializing in the political economy of energy. He joins GRI with a diverse background, having lived in Russia, Serbia, the UAE, the Netherlands and the United States. He contributes to the Atlantic Sentinel and E-International Relations, while also having done an internship at the Center for International Relations and Sustainable Development in Belgrade, Serbia.