Markets set high expectations for new coalition in Belgrade

BELGRADE – Serbia’s financial markets soared yesterday on news of a coalition government deal that should spare the country new elections and months of instability at a key time. But the new government will have to work hard to live up to market expectations that it will bring the country closer to the European Union and make up for the lost decade of the 1990s under late strongman Slobodan Milosevic. The EU said ties with Brussels could be «revitalized» after the deal between Prime Minister Vojislav Kostunica and President Boris Tadic was clinched four days before the expiry of a constitutional deadline. «This government signals continued relations with the EU and is good news for the business climate and for investors,» said analyst Goran Saravanja of Zagreb-based UniCredit MIB. «With the risk eliminated, this government must live up to investors’ and the EU’s expectations,» he told Reuters. «The pro-Western government is a very positive sign,» Herbert Preclik, Austria’s commercial councilor in Belgrade, told Reuters. «It will have a psychological effect on investors who can now see that Serbia will proceed with reforms, bringing it closer to the European Union.» A deal had appeared unlikely earlier in the week, after Kostunica backed a hardline nationalist for a top parliamentary job, enraging Tadic’s Democrats who had been negotiating with him since an inconclusive January 21 election. This flirt with nationalism spooked investors, leading the dinar 3 percent down and the bourse to tumble 15 percent. «To be in Serbia one has to have the stomach to bear all the ups and downs and to look five years ahead,» said a Western economic analyst, who asked not to be named. «But given developments in the region, the EU is the only choice.» The 16 weeks of uncertainty had damaged the country’s image despite its solid economic fundamentals, analysts said. Serbia’s Investment and Export Promotion Agency (SIEPA) said the climate had weighed on investor interest, with the number of daily enquiries falling seven to eight times on the same period in 2006. Some also allegedly pulled out of already agreed deals. «This (government) is the best option, but they have yet to come out with a program and budget to show they are truly committed to reforms,» SIEPA’s Aleksandar Miloradovic said. Committed to reform The crisis followed a year of progress, when inflation fell to a 15-year low, growth hit 5.7 percent, investment doubled to some $4 billion and the dinar gained 9 percent. But risks remain, in the form of expansive fiscal spending, massive wage hikes, growing foreign debt and booming household borrowing. «The risks are definitely serious,» said Stojan Stamenkovic, chief macroeconomist at the Economics Institute think-tank. »We must now wait for official government policies to see how they plan to eliminate them.» In the short term, all eyes were on the budget, which would be one of the first policy moves of the new coalition. Officials have said the budget would be cut to below the $10 billion initially envisaged in a draft 2007 budget, bringing it more in line with International Monetary Fund advice. (Reuters)