Western Balkans has a great need for investments

In the previous month, we recorded several events that may have consequences for the economic policy and development perspectives of Serbia and the region

In cooperation with the Economics Institute and the Chamber of Commerce and Industry of Serbia, Diplomacy&Commerce magazine publishes MAT Brief, an excerpt from the Macroeconomic Analysis and Trends newsletter. In addition to articles from The Economist magazine, the new MAT Brief will round off our offer of top-quality economy-related articles and analyses essential for the operations of every large company, which will assist top managers with making the right decisions for their company and employees.

If the current trends are monitored through deseasonalized indices and trend-cycle values, the impression is that production has been growing since the beginning of the year, as opposed to the original index values that highlight the slowdown. The production trend is on a slightly increasing trajectory, mostly thanks to the production of electricity. Growth in the mining sector, which was the fastest last year, has stopped. External trade data show reduced dynamics, whereby, unlike exports, which are still growing, imports are dropping dramatically, which has a favourable effect on reducing the deficit. Both in March and April, the export-to-import ratio was almost 80%. Inflation was reduced in April 2023 both on a monthly and year-on-year basis and the expectations are that it would fall even more drastically in the coming months.

In the previous month, we recorded several events that may have consequences for the economic policy and development perspectives of Serbia and the region.

(1)    Firstly, the sentiment on global markets improved after the Fiscal Responsibility Act was passed in the US Congress. A political deal between Democrats and Republicans to raise the debt ceiling averted a potential economic disaster. The agreement approved the lifting of the debt limit to $31.4 trillion (thousand billion), just days before the world’s largest economy will fall into default. Thus, the negative sentiment and cautious trading on the global financial markets subsided. At the same time, the risk related to the problematic servicing of the national debt and American bankruptcy, as many times before, has proven to be irrational, although the last time when the USA was this close to crossing the debt threshold (in 2011), Standard&Poor’s lowered the country’s rating.

Fiscal adjustment in the US is hereby postponed, while the reached agreement does not raise the debt limit to a certain level, but rather the borrowing limit is completely suspended until 2025. A policy that is inadmissible and unfeasible in the rest of the world is normal for the US. It is universally accepted and repeated again and again – as the old Latin saying goes: “Quod licet Iovi, non licet bovi” („Gods may do what cattle may not“). This is a policy that is at odds with restrictive Fed measures, higher interest rates and tighter global financial conditions. The policy, which postpones the possibility of a faster reduction of global inflation, is declared an exceptional political success, and for investors a symbol of relief. 

The sentiment on global markets improved after the Fiscal Responsibility Act was passed in the US Congress

(2) In her speech at the GLOBSEC 2023 Forum in late May in Bratislava, the President of the European Commission, Ursula von der Leyen, surprised the audience and presented a new EU initiative for the Western Balkans. The plan, which aims to bring the Union even closer to the Western Balkans, promotes: (a) bringing the Western Balkans closer to the EU single market; (b) deepening regional economic integration; (c) expediting basic reforms; and (d) increasing pre-accession funds. The single market is a key driver of economic growth. There are great untapped potentials, starting from shortening import-export procedures to e-commerce and cyber security. The benefits of the single market in this sense should be felt not only by countries that are already EU members but also by all those that are on the way to becoming one. The concept of expanding the single European market would go hand in hand with an equal effort to deepen and reduce regional economic cooperation. In this way, the region would become an even more attractive place for European investors. Especially, if this integration is based on EU rules and standards. In this sense, the Union’s proclaimed readiness to offer the region in advance some of the membership advantages does not exclude the need to achieve an independent and efficient judiciary, an even stronger fight against corruption and compliance with the rules of public procurement procedures

Whether and how this principled political initiative will be implemented in practice remains to be seen. There is no doubt that there is a great need for investments in the Western Balkans, but also there are numerous limitations regarding their absorption. The countries of the region often fail in reaching their full capacity to use even these existing, limited and modest financial means from pre-accession funds. There is a lack of quality projects and institutions in charge of effective project implementation and supervision.

 (3)    Serbia has changed the criteria for awarding incentives to attract direct investments1. It is important to note that the criteria no longer take into account the degree of development of the local self-government unit (cities and municipalities) in which the investment project is implemented, nor the three-year duration of the single investment project. In order to receive the incentive, the minimum investment value is increased from 150,000 euros and the employment of 15 new workers for an indefinite period, to 300,000 euros and 30 new workers.

The amount of funds is now already defined at the level of the regions in which a production investment will be made. For example, investors who invested in the most developed areas, such as Belgrade, Novi Sad, Kragujevac, Niš, Subotica, Užice or Čačak, received 3,000 euros per workplace. The requirement was to invest 500,000 euros in production and employ 50 people. On the other hand, cities and municipalities that are classified in the fourth development group (i.e. the least developed), which include Aleksinac, Brus, Blace, Vlasotince, Dimitrovgrad, Ljig or Nova Varoš, could offer investors 6,000 euros per new job. The requirement was to invest at least 200,000 euros and create 20 new jobs. Investors in devastated areas such as Babušnica, Bela Palanka, Bujanovac, Vladičin Han, Lebane, Trgovište and Tutin received the most (7,000 euros per new job). The minimum investment here had to be 100,000 euros and employ 10 people.

Serbia has changed the criteria for awarding incentives to attract more direct investments.

Thanks to the new regulation, it is possible to apply for investment projects in the production sector located in the Belgrade region if the justified costs of investment in tangible and intangible assets amount to at least 500,000 euros and employ at least 50 new workers. For the region of Vojvodina, the minimum investment is 400,000 euros and 40 new employees, and for the regions of Šumadija and Western Serbia, that is, the Region of Southern and Eastern Serbia and the Region of Kosovo and Metohija, 300,000 euros and 40 new employees, respectively. Investment projects in the service sector which minimum value is 150,000 euros and which will create at least 15 new jobs for an indefinite period are also eligible for incentives.

The new deadline for the implementation of an investment project worth more than 5 million euros can be extended up to ten years from the date of submission of the application for the allocation of funds.

Abandoning the idea of classifying local territorial units per their development level as the key criterion for incentives could facilitate and expedite the very procedure of being granted an incentive. On the other hand, the increase in the minimum amount of qualified investment partly represents a correction for inflation from the previous three years (i.e. devaluation of the value of money), as well as the state’s desire to additionally attract more valuable investments and more technologically advanced investment projects in the production sector.

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