Serbia investors jumpy

BELGRADE – Foreign investors in Serbia are holding their breath after the ascent of a hardliner to a top job torpedoed coalition talks, signalling delays to reforms and more obstacles on Serbia’s path to European Union membership. The deadlock has weighed on the stock and currency market and risked creating a power vacuum just as the United Nations mulls independence for Serbia’s breakaway Kosovo province. «Investors will seek other markets to put money in,» said an international banker based in Belgrade. «Serbia is a small market with political danger.» Prime Minister Vojislav Kostunica, a moderate nationalist, and the pro-Western Democratic Party have been holding on-off talks to form a coalition since a January 21 election. The West hoped they would agree and form a government that keeps Serbia firmly looking to Europe and away from the nationalism of the 1990s. But Kostunica backed ultranationalist Tomislav Nikolic for the job of parliament speaker, enraging the Democrats and making a coalition unlikely before the May 14 deadline for new elections. The EU condemned the move and there were rumours Kostunica might now seek a coalition with Nikolic’s Radical Party, seen by the West as heirs to the late autocrat Slobodan Milosevic. The stockmarket had fallen by a total of 10 percentage points by Wednesday, which some brokers calculated as a -1.6 billion slide in value. The central bank intervened on Tuesday and Wednesday, spending -75 million to prop up the sliding dinar and to prevent a panic run for hard currency in anticipation of a possible return to the high inflation that plagued Serbia during Milosevic’s rule. «Foreign investors have not started selling yet, they’re waiting to see what happens,» said broker Rade Rakocevic. «New elections would slow down the fall, but a government backed by the Radicals would lead to a steep decline.» Ratings at risk Some investors worried about the effect of the crisis on Serbia’s ratings, which have traditionally been swayed more by the country’s volatile politics rather than its solid fundamentals such as annual growth of over five percent. «We believe the country’s rating is going to be cut due to political risk,» said a Belgrade-based investment consultant. Fitch has Serbia’s short-term rating at B and the country ceiling at BB-. Merrill Lynch last month cut its external debt exposure in Serbia to market weight from overweight, noting the economy had started to suffer from the lack of a government. S&P affirmed its ‘BB-‘ long-term and ‘B’ short-term rating in late April but noted the rating remained constrained by significant political risk. Serbia earned a record $4.1 billion from privatizations and foreign direct investment in 2006, but key assets such as landline telecoms, oil, gas and power are still in state hands. Early data from government agencies shows privatization inquiries have fallen dramatically this year and there are concerns that a lingering perception of instability could put off investors and maybe lower prices, hurting state income for years to come. «Without clear policies that will be consistent in the next 10 years… it will be very difficult for foreign investors to work in Serbia,» Eugenio Sidoli, director of the Serbian unit of Philip Morris, a division of Altria, told Politika daily this week. In the short to medium term most point to the political challenges ahead, such as Kosovo and Serbia’s path to the EU. Kosovo’s Albanian majority population expects to get independence by summer with the West’s backing. A backlash over the loss of the province could strengthen the hardliners in a new election and weaken pro-Western parties. Serbia would fail to fulfil Brussels’ key demand of handing over war crimes fugitives and remain the regional EU laggard. «Elections look likely and the market won’t be pleased,» said Citigroup in a report, adding developments were «unfortunate» and affecting sentiment negatively «in the face of increased concerns over where the country is heading.»