Investment Climate in Serbia

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It is extremely important that Serbia continues its progress in the OECD categorization, which implies not only reforms of internal legislation, in particular in guaranteeing equal treatment and return on invested capital to domestic and foreign investors, but also a clearer situation in the part of basic prerogatives of state authorities and legal framework, such as territorial integrity, security and the functioning of the judical system

Text: VLATKO SEKULOVIĆ Attorney at Law

As an investment destination, Serbia belongs to a group of countries that are trying to attract foreign investors by providing significant incentives. The rules under which the EU Member States and those in the process of the EU accession must adhere to in terms of planning and allocation of incentives must be in line with the state assistance rules determined by the European Union. In this context, countries can define incentive models that will put more emphasis on some of the components that are assessed when awarding subsidies, such as the number of created new jobs, locations, technologies used, etc. However, each of them is in competition with each other, which of course, benefits investors, both foreign and domestic, because they have the option of choice, while countries, as investment destinations, are competing for limited global capital. Bearing in mind that we are talking about the global market, the countries of South East Europe are not only in competition with other countries in the region but in some industries, especially where production is “virtual”, they are competing against faraway destinations. In addition to this factor, which investors take into consideration when deciding on the investment location, they also take into account other factors.
The basic factor influencing the decision of large investors is the country’s credit rating, i.e. the risk factor for a given country. The basic rating is determined by the Organization for Economic Co-operation and Development (OECD), based on the Marshall Plan, which currently has 36 members. This organization is conceived as part of efforts to rebuild the European economy after the World War II catastrophe, during which the complete European market was completely destroyed.
Considering the numerous functions that this organization originally had, some of which eventually disappeared or were taken over by the European Economic Community, one function remained in the focus of the OECD – a country’s risk assessment. Based on a complex methodology, the OECD Credit Committees classify countries in categories from 1 to 7, as well as uncategorized, depending on the estimated risk that one country represents. For instance, Slovenia and the USA are uncategorized countries, while Syria and Mali belong to Category 7. At this moment, Serbia is classified as Category 5, along with Macedonia and Turkey, with Croatia being classified as Category 4, Bulgaria and Romania Category 3 respectively. Poland and Hungary are also uncategorized. What this means is that Serbia is at the very beginning when assessing risk and making investment decisions, especially when it comes to large investors, and in that respect, is ranked worse than its main competitors Bulgaria and Romania. A higher country risk simply means that capital investments in a particular country are more expensive than in some other countries with a lower risk. Bearing in mind the importance of the OECD Credit Committee’s assessment for the ranking done by private rating agencies such as Moody’s, Standard & Poor’s, and Fitch, it is clear that the country’s credit risk is one of the factors that significantly influence the decision of a certain a group of investors, such as Volkswagen, which is then reflected on the overall investment climate and impacts the decisions of other smaller investors. In that sense, it is extremely important that Serbia continues its progress in the OECD categorization which implies not only the reforms of internal legislation, especially in guaranteeing equal treatment and return on invested capital to both domestic and foreign investors, but also a clearer situation in the part of basic prerogatives of the state authorities and the legal framework, such as territorial integrity, security and the functioning of the judicial system.

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