ECONOMY

Serb currency reserves to drop

BELGRADE – Serbia’s currency reserves are likely to fall by $1 billion in 2008 as the economy weakens and foreign capital inflows dry up, analysts said. Investors have put their plans for Serbia on hold until after an early general election called for May 11, said Stojan Stamenkovic, chief economist at the Economics Institute think tank. «The main concern is the decline in foreign direct investment, which stood at $3.1 billion in 2007 and will, optimistically, reach $2.0 billion this year,» he told a news conference. Capital flows into Serbia have been slowing, while the current account deficit has grown. To help cover the current account gap, which reached $6.9 billion in 2007, Serbia would need at least $4 billion in 2008 in foreign investment and external borrowing, with reserves making up any shortfall. «Looking at the balance of payments, it clearly indicates a decline in foreign currency reserves by around $1 billion,» Stamenkovic said. The May election was called after the ruling coalition of nationalists and pro-Western parties fell out over whether Serbia should pursue European Union membership despite the EU’s support for the independence of Kosovo. Dun & Bradstreet on Tuesday left its rating for Serbia at DB5a, indicating high risk and citing political uncertainty and a «not entirely encouraging outlook» for the economy in 2008. Earlier this month, central bank Governor Radovan Jelasic said official reserves could be severely hit if nationalists win the election, and he vowed to tighten policy to defend the reserves. Inflation risks Analysts at the Economics Institute said a date to watch will be May 7, when six-month private savings contracts with banks expire. «We will see then if there is panic ahead of the elections and if people withdraw money altogether or only collect interest,» Miladin Kovacevic said. Currency reserves stood at $14.6 billion in March, equivalent to 10 months of imports. But only 10 percent are central bank reserves. The rest is state-owned money and cash banks keep in mandatory reserves and repos. Anti-Western feeling has grown in Serbia since the secession of ethnic Albanian-majority Kosovo in February. Polls predict a neck-and-neck race between the pro-Western Democratic Party and the nationalist Radicals. «Initial data for this year show investors are on hold,» Stamenkovic said. «Inflationary expectations are rising and the risk of doing business in Serbia is growing.» Standard & Poor’s cut its outlook on Serbia’s credit ratings in March to negative from stable on risks that hardliners might win the May election, freezing EU progress. «Due to the political turmoil, the issue of inflation this year will be secondary,» Stamenkovic said. Headline inflation hit 11.8 percent in March – nearly double what the government had planned for the year – mainly driven by more expensive crude oil and food prices. The central bank has raised its key policy rate three times since January by a total of 450 basis points to 14.5 percent to try to prop up the dinar and tame prices, but without success. «The planned inflation (target) will definitely be impossible to reach,» Stamenkovic said. «We believe that headline inflation in 2008 will be between 10 and 15 percent, but considering all other risks, this is certainly not a big deal.»