Divergent Growth ProspectsWhile the worst of the global economic downturn has now passed,we stress that our core views for Serbia, Montenegro and Kosovoremain unchanged. Indeed, with the eurozone expected to remaincharacterised by fiscal austerity and a protracted period of low growthin 2010 and beyond, we have not seen a robust recovery in theBalkans, but growth rates that remain below pre-crisis levels. TheSerbian consumer remains under pressure, and we do not expect tosee a fundamental improvement in domestic credit conditions until2011 at the earliest. With government consumption in Serbia stillunder pressure from the IMF's EUR 2.9bn Stand-By Arrangement,Belgrade will be unable to pursue fiscal stimulus to boost its economyand this factor weighs on our growth outlook for the region throughto 2014.A lthough Serbia denounced the ruling of the International Court ofJustice, which determined that Kosovo did not breach internationallaw by unilaterally declaring its independence from Serbia on February17 2008, it has moderated its position and agreed to talks withPristina on the back of increased pressure from the EU and US .Indeed, Serbia has thus far accepted the new reality that further EUaccession progress hinges on resolving its disputes with Kosovo,against the backdrop of its former breakaway province gainingincreased international recognition.Montenegro will experience a slow recovery in domestic demandas structural imbalances in the Montenegrin economy unwind overour forecast period. In the near-term, the return to production ofKombinat Aluminijuma Podgorica (KAP) has provided a tailwind togrowth, underpinning our 0.5% real GDP growth forecast for 2010.Going forward, the small size of the economy and strong interest offoreign investors buttress our 2011-2015 average real GDP growthforecast of 5.0%.T he recent political deadlock in Kosovo will likely delay the passageof the 2011 government budget until after new elections, postponingthe procurement of key revenue streams and posing downside risksto our budget deficit forecast of 0.2% of GDP in 2011. That said,we see Kosovo's fiscal picture improving steadily beyond next yearas revenues increase due to a maturing taxation frame, foreign aidinflows remain steady, and continued privatisation of state assets.

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Serbia, Montenegro and Kosovo Business Forecast Report Q1 2011
Published on November 2010
Report Summary
Divergent Growth Prospects
While the worst of the global economic downturn has now passed,
we stress that our core views for Serbia, Montenegro and Kosovo
remain unchanged. Indeed, with the eurozone expected to remain
characterised by fiscal austerity and a protracted period of low growth
in 2010 and beyond, we have not seen a robust recovery in the
Balkans, but growth rates that remain below pre-crisis levels. The
Serbian consumer remains under pressure, and we do not expect to
see a fundamental improvement in domestic credit conditions until
2011 at the earliest. With government consumption in Serbia still
under pressure from the IMF's EUR 2.9bn Stand-By Arrangement,
Belgrade will be unable to pursue fiscal stimulus to boost its economy
and this factor weighs on our growth outlook for the region through
to 2014.
A lthough Serbia denounced the ruling of the International Court of
Justice, which determined that Kosovo did not breach international
law by unilaterally declaring its independence from Serbia on February
17 2008, it has moderated its position and agreed to talks with
Pristina on the back of increased pressure from the EU and US .
Indeed, Serbia has thus far accepted the new reality that further EU
accession progress hinges on resolving its disputes with Kosovo,
against the backdrop of its former breakaway province gaining
increased international recognition.
Montenegro will experience a slow recovery in domestic demand
as structural imbalances in the Montenegrin economy unwind over
our forecast period. In the near-term, the return to production of
Kombinat Aluminijuma Podgorica (KAP) has provided a tailwind to
growth, underpinning our 0.5% real GDP growth forecast for 2010.
Going forward, the small size of the economy and strong interest of
foreign investors buttress our 2011-2015 average real GDP growth
forecast of 5.0%.
T he recent political deadlock in Kosovo will likely delay the passage
of the 2011 government budget until after new elections, postponing
the procurement of key revenue streams and posing downside risks
to our budget deficit forecast of 0.2% of GDP in 2011. That said,
we see Kosovo's fiscal picture improving steadily beyond next year
as revenues increase due to a maturing taxation frame, foreign aid
inflows remain steady, and continued privatisation of state assets.
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Table of Content
Executive Summary.. 7
Divergent Growth Prospects
Chapter 1.1: Political Outlook - Serbia.... 9
SWOT Analysis.... 9
BMI Political Risk Ratings.... 9
Foreign Policy.... 10
EU Move To Bolster Accession Progress
Serbia's accession process advanced to the European Commission after being recommended for further
consideration by the EU 's 27 foreign ministers, a positive development for Belgrade's convergence prospects.
Tabl e: Political Ov erview... 10
Chapter 1.2: Economic Outlook - Serbia..... 13
SWOT Analysis.. 13
BMI Economic Risk Ratings..... 13
Economic Activity... 14
Tabl e: ECONO MIC ACTI VIT Y..... 14
Monetary Policy. 16
Tabl e: MONETAR Y PO LIC Y. 16
Fiscal Policy I.... 17
Tabl e: FISCA L PO LIC Y... 18
Fiscal Policy II ... 19
Chapter 1.3: 10-Year Forecast - Serbia. 21
The Serbian Economy To 2020 21
Tabl e: Long-Term Macroeconomic Forecasts..... 21
Chapter 1.4: Business Environment - Serbia . 23
SWOT Analysis.. 23
Business Environment Outlook ..... 24
Institutions .. 24
Tabl e: BMI Business And Operation Risk Ratings 24
Tabl e: BMI Legal Framework Rating 25
Infrastructure .... 26
Market Orientation .. 27
Tabl e: Labour Force Quality.. 27
Tabl e: Em erging Europe ' Annual FDI Infl ows..... 28
Tabl e: Trade And Investment Ratings.... 29
Operational Risk ..... 30
TA BLE: TOP EXPORT DESTINATIONS ... 30
Chapter 1.5: Key Sectors - Serbia . 31
Pharmaceutical . 31
Tabl e: Serbia ' Drug Ex penditure Indicators, Historical Data and Forecasts 32
Tabl e: Serbia ' Generics Market Indicators, Historical Data And Forecasts.. 32
Chapter 2.1: Political Outlook - Montenegro.... 35
SWOT Analysis.. 35
BMI Political Risk Ratings.. 35
Domestic Politics.... 36
Tabl e: Political Ov erview... 36
Chapter 2.2: Economic Outlook - Montenegro. 39
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SWOT Analysis.. 39
BMI Economic Risk Ratings..... 39
Fiscal Policy 40
Tabl e: FISCA L PO LIC Y... 40
Chapter 2.3: 10-Year Forecast - Montenegro.... 43
The Montenegrin Economy To 2020..... 43
Tabl e: Long-Term Macroeconomic Forecasts..... 43
Chapter 2.4: Business Environment - Montenegro ..... 45
SWOT Analysis.. 45
Business Environment Outlook..... 46
Institutions .. 46
Tabl e: BMI Business And Operation Risk Ratings 46
Tabl e: BMI Legal Framework Rating 47
Infrastructure .... 48
Tabl e: Labour Force Quality.. 49
Market Orientation .. 50
Tabl e: Em erging Europe ' Annual FDI Infl ows..... 50
Tabl e: Trade And Investment Ratings.... 51
Operational Risk ..... 52
Chapter 3.1: Political Outlook - Kosovo ..... 53
SWOT Analysis.. 53
BMI Political Risk Ratings.. 53
Foreign Policy ... 54
Domestic Politics I.. 54
Domestic Politics Il. 54
Tabl e: Political Ov erview... 56
Chapter 3.2: Economic Outlook - Kosovo . 57
SWOT Analysis.. 57
BMI Economic Risk Ratings..... 57
Fiscal Policy 58
Tabl e: FISCA L PO LIC Y... 58
Regional Monetary Policy... 59
Chapter 3.3: 10-Year Forecast - Kosovo .... 63
The Kosovan Economy To 2020.... 63
Tabl e: Long-Term Macroeconomic Forecasts..... 63
Chapter 4: BMI Global Assumptions .... 65
Global Outlook... 65
US Quantitative Easing Spurs Forecast Revisions
TA BLE: GLOBAL ASSU MPTIONS 65
TA BLE: GLOBAL & RE GIONA L REA L GDP GRO WTH % CHG Y-O-Y... 66
TA BLE: BMI VERSUS BLOO MBER G CONSENSUS . 66
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