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Balkan commentator Richard Cowper in Belgrade says pro-European Democrats are still battling against the old-style nationalist Radicals to form a new government in Serbia.

Investors fear radical coalition may propel Serbia back to the future

Leading Western nations and foreign and domestic investors - already dismayed by months of political limbo - are becoming increasingly nervous that a three-sided coalition of right-wing radicals, old-style nationalists and unreformed socialists might be on the brink of taking power in Serbia, steering the country’s economy into dangerous waters.

Such a potentially anti-business, anti-European Union coalition with something of an obsession with the past, they believe, could prompt a further economic slowdown, a decline in foreign investment, fresh falls on the stockmarket and a rethink of privatisation policy.

“If Tomislav Nikolic’s radicals form an administration with Slobodan Milosevic’s old SPS socialist party with Vojislav Kostunica as prime-minister you can bet on a further slowdown in growth, foreign investment on hold and a government that propels the country back to the future,” said one leading economic commentator in Belgrade this week. “Expect the country to shift away from the EU and a little closer to Russia”.

Economic growth in 2007 under a Democratic Party (DS)-led coalition was a buoyant 7.5%, but the government’s pre-occupation this year with political issues and then its collapse in March after the then southern Serbian province of Kosovo unilaterally declared its independence on February 17, has combined with a worldwide slowdown to push current forecasts for 2008 growth in gross domestic product down to as low as 5%, depending on weather and agricultural output.

Such a slowdown would be worrying in a country where industrial output is less than half what it was in 1989 and where unemployment is at least 20 per cent of the workforce.

Inflation (10% in 2007) is already heading up well beyond 14% per annum and net foreign direct investment, a healthy US $4.4bn in 2006 fell to an estimated $3.1bn in 2007.

Businessmen are fearful if a radical government is formed with Mr Kostunica of the Democratic Socialist Party (DSS) at the head of a right-wing nationalist coalition linking Mr Nikolić’s Serbian Radical Party (SRS) and Ivica Dacic’s Socialist Party (SPS) foreign investment might fall to an even lower level. The country’s widely respected Economic Institute (EI) and the Serbian Foreign Investors Council believe it could decline to $2.5bn or less in 2008, possibly below $2bn, depending on which parties make up the government.

Businessmen and fiscal policymakers are particularly worried that a Radical-led administration might be tempted to play fast-and-loose with the country’s much-acclaimed and highly conservative monetary policy. “If such a coalition continued to put off foreign investors and then tried to move the key people out of the central bank and the finance ministry we could end up with a serious balance of payments crisis and a sharp run-down in reserves,” says one economist worried that a division of the spoils in the coalition horsetrading might result in the loss of key technocrats and a dangerous shift in policy.

The bitter rhetoric over Kosovo’s unilateral declaration of independence - backed by almost 40 nations worldwide, including the US and most of the European Union - has deeply worried foreign investors who have put expansion on hold. The fear is that a fresh negative switch in emphasis on joining the EU by a radical-led government will further slow annual foreign direct investment flows, vital for covering the country’s hefty balance of trade deficit. This could result in a potentially dangerous run-down in reserves.

The deficit on the current account, mainly due to a huge gap between the value of exports and imports, was already $6.9bn in 2007, up 74% up on the previous year. The fear is the gap could be even wider this year.

Says the Economics Institute in its latest report: “If political circumstances cause further restraint in inward foreign investment for the whole of this year – by the end of 2008 we could face a very dangerous situation regarding the country’s financial stability.”

The nation has already suffered at least six months of decision-making limbo as a result of the December 10 presidential election and the acrimonious 10-week long general election campaign leading up to this month’s May 11 poll.

This has already sharply dented business confidence. In the last 12 months the stockmarket Belex 15 index has dropped from a high of 3,164 in May 2007 to 1,863 this week, a fall of 41% as businessmen and investors have become increasingly worried that old political obsessions were pushing aside reforms and economic decision-making and slowing down efforts towards joining the EU.

The country’s privatisation programme was supposed to have been completed by the end of 2007, but even optimists now do not expect it to be finished before 2009.

The possibility of a further three month delay before any new Serbian government is formed while the country’s 10 active parties battle it out to create a viable 126-seat coalition majority in the 250-seat parliament is causing more jitters in the business community.

But even a coalition led by the more business-friendly and EU-oriented Democrats has a lot of work to do to get the economy moving at full-speed ahead again.

A growing number of investors, local technocrats and politicians are demanding institutional reform, so that political uncertainty is not always directly translated into economic uncertainty.

Since the year 2000 alone there have been eight presidential and parliamentary elections, many of them inconclusive, shortlived and subject to lengthy periods of negotiations for access to lucrative jobs in the government and state company sector.

“The billions of dinars at stake in the corrupt coalition horsetrading process and the politicisation of the civil service means that every time there is a political crisis ordinary people’s jobs are effectively put on the line. This cannot continue if this country is to join the 21st century,” says Aleksandar Vasovic, a Belgrade-based analyst who has closely observed most of the elections of the last decade.

The EU’s top representative in the country agrees. “Only through integration with the European Union can Serbia effectively steer through reform and significantly and lastingly improve the economic and social conditions of its citizens. Serbia is lagging behind in this process, but has a solid capacity to catch up. Developments over the weeks and months to come should tell us how likely this is,” Mr Josep M LLoveras, EU ambassador to Serbia told me in an exclusive interview.

Some voters had hoped that President Boris Tadic’s pro-European democratic bloc might have been able to deal with this issue, but despite being part of the government for almost eight years there was little attempt to tackle this deep institutional weakness.

Mr Tadic’s DS party is convinced that only by actively moving to join the EU and in the process adopting all its legal, trade, financial and anti-corruption measures can this be dealt with.

Serbians may suffer from a surfeit of history due to their obsession with the past, but recent events suggest that a government in which the Serbian Radical Party led by Tomislav Nikolić is in the driving seat will not be one that is seen as being friendly to the EU, or to business and foreign investment.

When Mr Nikolić was elected parliamentary speaker in May last year the Belex 15 stock market index lost about 25 per cent of its value and the Serbian dinar currency fell by 3.5 per cent, forcing the central bank to intervene to halt the slide.

Some are even more concerned at the extreme nationalist and anti-business reputation of Vojislav Seselj, the chairman of the Radical party, who they fear will return soon to run the party from the Hague where he is on trial for war crimes.

The Radicals say all this is simply political scaremongering. During the election campaign Mr Nikolic even went so far as to use an interview with the Financial Times of London – seen as one of the world’s most pro- capitalist newspapers – to suggest that companies would have no cause to worry if he came to power. He even used quotes from the article in adverts in the national press.

Demonised by some western countries and liberal Serbs as the spiritual heir to Milosevic, who led Serbia through a decade of wars and poverty, Mr Nikolic has sought to cast off his ultranationalist image. He favours joining the EU but only on Belgrade’s terms, and has vowed never to give up Kosovo or hand over alleged war criminals. He seeks closer ties with Russia and also China and the Arab world.

The Radicals may be engaging in wishful thinking however if they think they can have it both ways. In the midst of the bitter poll campaign Fiat, the Italian carmaker did sign a deal to invest Euros 700m deal to produce new car models at Serbia’s state-owned Zastava plants. But it was only a memorandum of understanding and could still be put on hold if things go awry.

Says the most high-powered EU diplomat in Serbia:”They might think we will do anything to ensure stability in the region and maintain close relations with Belgrade. But this is not true. More than half of Serbia’s foreign trade is with the EU and a major part of its foreign investment. Serbia needs Europe more than the EU needs Serbia.”


*Richard Cowper is an economist and foreign policy expert, who worked for the Financial Times of London for 30 years. He can be contacted by email at