Fitch Ratings says the adoption of a new constitution by the Serbian Parliament at the weekend is likely to usher in a period of heightened political uncertainty. A referendum on the new constitution is set for the end of the month and is likely to be followed by early parliamentary elections. The assertion in the constitution that Kosovo is an integral part of Serbia could put the country on a collision course with the international community. At the same time, the pro-European G17 Plus Party has resigned from the coalition government. «Political developments over the weekend are likely to trigger a period of political turbulence and raise event risk,» says Edward Parker, Head of Fitch’s Emerging Europe Sovereigns team. «The next few months are likely to have a critical bearing on the future economic and political direction of the country and trends in creditworthiness.» Fitch sees two main risks. First, whether parliamentary elections result in another coalition government of democratic parties that implements economic reforms and pursues EU accession or leads to a more nationalist and collectivist government. And, secondly, whether Serbia’s leaders can draw a line under the past and establish normal international relations by reaching an agreement over the status of Kosovo and fully cooperating with International Criminal Tribunal for the former Yugoslavia (ICTY). Fitch says the Serbian economy has been performing strongly this year, with GDP growth likely to exceed percent. Record foreign direct investment is flowing into the country, privatization and structural reforms are progressing, the budget is in surplus and the government is repaying public external debt. Despite these positive trends, however, Fitch has maintained a Stable Outlook on its «BB-» (BB minus) foreign currency Issuer Default rating (IDR) for the Republic of Serbia owing to significant political risks. Complex schedule A new constitution is needed and had been long anticipated, and could help clear the air. The version adopted by the Serbian Parliament at the weekend is expected to be put to a popular referendum on October 29 and 29 and then be followed by parliamentary elections, probably in December, and also possibly presidential elections. Nevertheless, the concentrated and complex electoral schedule will heighten short-term political risks. To add to the uncertainty the pro-reform, pro-European G17 Plus Party has resigned from the coalition government, citing the Serbian government’s failure to make progress with the surrender of Bosnian-Serb general Ratko Mladic, which has derailed the country’s negotiation with the European Union on a Stabilization and Association Agreement. However, the maneuver may also reflect political tactics and Finance Minister Mladjan Dinkic and other ministers are expected to remain in post until the elections. The uncompromising language in the new constitution may bolster the electoral standing of the Democratic Party of Serbia (DSS) of Prime Minister Vojislav Kostunica and the Democratic Party (DP) of President Boris Tadic and thereby suppress the support for the nationalist Serbian Radical Party (SRS), which is leading in the opinion polls. In Fitch’s view, the most likely scenario is that a new reformist coalition government is formed after the elections. However, the confluence of events, personal rivalries and the nature of coalition bargaining means that a negative shock in the form of the inclusion of extreme nationalists in power cannot be ruled out.