On behalf of the Serbian Association of Economists we are pleased to invite you to the
The Kopaonik Business Forum (KBF) is a high-profile event committed to improving the performance of the Serbian economy through analytical contributions and dialogue between major relevant stakeholders. For more than a decade the event has enjoyed the conceptual patronage of the Prime Minister of the Republic of Serbia and attracted a significant number of participants from the region. Partnership with Mastercard company secures additional support in achieving greater visibility and enhancing the quality of this important event. Recently, the Forum has been gathering on average more than thousand participants annually, including heads of state, prime ministers and ministers, high representatives of regulatory bodies, representatives of international financial institutions, respectable scholars, diplomats, business practitioners, and media.
As usual, this year event is organized through plenary sessions, panel discussions, special events, and peer-to-peer sessions. Our exceptional roster includes close to two hundred speakers from academia (mostly economics, business management, and ICT), politics, finance, and business. Flagship thematic studies from IFIs will be presented again at the KBF along with new academic and policy papers by leading researchers and scholars in topical fields. The KBF continues to provide a unique opportunity for participants to meet and discuss relevant issues. The title of this year’s annual meeting is:
KBF 2024 is again a four-day event.
Day Zero, Sunday March 3, is dedicated to macroeconomic analysis of recent developments in Serbia and to an outlook for the Western Balkan region in year 2024. Day Zero will also feature presentation of the most recent company reputation (KBF) index results, and short info on the status of the creative industry and Digital Serbia Initiative.
Day One, Monday March 4, will open with keynote addresses by the Serbian Governor of the Central Bank, and the Minister of Finance devoted to major macroeconomic (monetary and fiscal) policy developments in Serbia, followed by a Special Guest Speaker from the World Bank and an address by the IMF Mission Chief for Serbia. Afternoon sessions will start with a panel devoted to the future of the EU enlargement and the Western Balkans featuring leading diplomats and government and NGO officials. Day One afternoon will offer topical panels on: advanced digital cooperation, climate change, regional economic cooperation, skills mismatch crisis in the Serbian labor market, cashless economy, and artificial intelligence. Late afternoon and evening sessions will cover topics such as: automotive industry, insurance industry, the challenges of Serbian economy (as seen by investors), and green transition plan for Serbia. The Day One will conclude with the online address of Special Guest of KBF, prof. Jeffrey Sachs, Director of the Center for Sustainable Development at Columbia University.
Day Two, Tuesday March 5, will start with plenary session contributions from Minister of Science and Tax revenue service Director, and continue with following panels: road to energy transition, infrastructure development, and digital transformation of the finance industry. In addition, you will have an opportunity to listen panels on the competitiveness of small and medium size export-oriented sector, human capital development, bringing circularity to life, future without workers, and women of change. Afternoon panels will elaborate on the role of sport in business and society, and the new trends in education 4.0. Evening panels will cover the banking sector, sustainable agriculture, and the news in real estate development. KBF will present four young entrepreneurs, and their path to success. The Day Two will conclude with a hard-talk interview with Mr. Miroslav Mišković, the biggest private investor in Serbia.
Day Three, Wednesday March 6, will start with a plenary session, expecting contributions from government and WHO officials, and continue with panels on gender equality issues, youth friendly policies and business practices, battle for talents and rethinking health financing based on data. The KBF will conclude with an interview with Prime Minister Ana Brnabić and closing remarks by the President of SES.
The 2024 Forum takes place in an exceptionally complex geopolitical and geo-economic situation, appropriately labeled “poly crisis” – a situation characterized by multiple concurrent crises with different causes, and distinctly different logic and possible solutions.
On the economic side, recent experience with multiple crises can be traced back to 2008 financial crisis which expanded into global economic and trade crisis. On the geopolitical side, it included Russian military intervention against Georgia. On the health side, it was marked by a swine flu epidemic in 2008/9.
A new conflagration of crises that form the present “global poly crisis” was initiated by the pandemic in 2020, followed by the Russian aggression against Ukraine in early 2022 and the ensuing energy crisis, and food and cost-of living crises on a global scale. Most recently, the Middle East war exacerbated geopolitical tensions to a new high to further deepen the “poly crisis”.
Less visible but equally worrisome dimensions of the “poly crisis” include acute environmental concerns, geo-economic fragmentations (GEF), and the (positive and negative) disruptions from the fast growing generative artificial intelligence (AI).
World: Resilient Global Economy Still Trails Pre-pandemic Performance
The global economy continues to recover from the pandemic and shocks unleashed by Russia’s invasion of Ukraine, the energy, and the cost-of-living crisis. In retrospect, the resilience of the global economy has been remarkable. Heavy disruptions in energy, commodity and food markets caused by the war, and monetary tightening had slowed economic growth. But it did not cause global recession.
Serious growth and macroeconomic stability challenges still lie ahead. Global economic activity bottomed out at the end of 2022, but full recovery to pre-pandemic levels of GDP and price stability still remain out of reach. This is particularly true for emerging and developing countries.
Based on the IMF’s October 2023 projections, global GDP growth will slow from 3.5 percent recorded in 2022 to 3.0 percent in 2023, and 2.9 percent in 2024. This is well below the 3.8 percent historical average recorded during 2000-2019 period.
The advanced economies are expected to slow down from 2.6 percent growth in 2022 to 1.5 percent in 2023 and further to 1.4 percent in 2024. These projections reflect stronger growth dynamics in the US and weaker expected growth in the EU. Namely, the US economy is now forecast to retain the same 2.1 percent growth in 2022 and 2023, and slow down to 1.5 percent in 2024. By contrast, GDP growth in the EU is forecast to drop from 3.3 percent in 2022 to only 0.7 percent in 2023, and only mildly recover to 1.2 percent in 2024. Poor EU growth performance is mainly due to expected 0.5 percent German GDP decline in 2023 and a weak 0.9 percent growth in 2024.
Emerging market and developing economies are projected to have a marginally lower 4.0 percent GDP growth in 2023 and 2024 compared to 4.1 percent growth achieved in 2022, reflecting both global disruptions and continued property sector crisis in China.
Mediocre Medium Term Growth Prospects: International financial and development institutions and more than 100 private and public economic forecasting institutions all agree that the next medium term will be marked by the lowest expected GDP growth in decades with adverse prospects for higher living standards and income convergence.
The latest World Economic Outlook (WEO) forecasts global growth in 2028 at 3.1 percent, compared to 3.6 percent medium term growth expected in early 2020 just before the pandemic, and 4.9 percent projected before the onset of the global financial crisis in 2008. Medium term forecast for advanced economies stands at 1.7 percent GDP growth in 2028, and 3.9 percent for emerging and developing economies. Per capita GDP growth projections for advanced economies follow the same declining pattern. This confirms that declining population is not the cause of slower growth, but rather lower capital accumulation per worker, slower total factor productivity growth and slowdown in labor force participation in advanced economies.
Weaker growth prospects are likely to adversely affect income convergence across economies, and make it more difficult to build and sustain fiscal buffers needed to respond to challenges posed by the shock-prone world, and to attract (crowd in) needed investments.
Overall, based on current policies and structural weaknesses, a full recovery of global output to pre-pandemic level seems very unlikely in the medium term. The latest medium term projections imply a global output loss of some 5.0 percent of GDP. In terms of constant 2023 US Dollars, output loss will range from $4.5 trillion in 2024 to about $6.4 trillion in 2028.
Global inflation is forecast to decline steadily. Headline inflation (year-on-year) decelerated from 9.2 percent in 2022 to 5.9 percent in 2023 and 4.8 percent in 2024. Core inflation, excluding food and energy prices, is also projected to decline, albeit more gradually than headline inflation.
These projections are increasingly consistent with a “soft landing” scenario which relies on disinflation policies without a strong downturn in economic activity and an increase in unemployment.
It should be noted that despite good results in taming inflation, recent inflation estimates for 2023 and forecasts for 2024 have been revised upwards indicating that inflation pressures persist. Return to low inflation targets is not likely until 2025 in most cases.
Three global underlying forces are currently at play.
First, the recovery in service sectors is almost complete. Strong consumer demand benefited service-oriented economies more than traditional manufacturing powerhouses. High demand for labor-intensive services also translated into tighter labor markets, higher wages and more persistent services inflation. These trends will be reversed in 2024 returning to more balanced service and manufacturing dynamics, and related labor market and real wage developments.
Second, part of the growth slowdown is caused by tighter monetary policy. The transmission channels and impact (through tighter credit conditions, housing markets, investment, and economic activity) are uneven across countries.
Third, inflation and economic activity are shaped by past commodity price shocks. Economies exposed to higher increase in imported energy prices often experienced a stronger pass-through and a sharper economic slowdown.
Risks going forward: While some of the extreme risks—such as severe banking instability—have moderated since April, the balance remains tilted to the downside.
First, the real estate crisis in China is not over and represent an important risk for the global economy. The underlying policy challenge in restoring confidence is complex. It requires prompt restructuring struggling property developers while preserving financial stability and national and local level.
Second, geopolitical tensions and disruptions related to climate change could trigger new volatility of commodity prices with adverse consequences on economic growth, inflation, financial stability and investor confidence.
Third, while both underlying and headline inflation have decreased, they remain uncomfortably high. Near-term inflation expectations have risen markedly above target. Bringing these near-term inflation expectations back down below target is of paramount importance in taming inflation.
Time is of essence here as tight labor markets, ample excess savings in some countries, and adverse energy price developments could give rise to more entrenched inflation mechanisms, requiring forceful action from central banks with negative impact on growth and employment.
Fourth, fiscal buffers have been eroded (or depleted) in many countries due to fiscal interventions during the pandemic and ensuing slower growth. With elevated debt levels, rising funding costs, slowing growth, and a gap between the growing demands on the state services and available fiscal resources, there is an acute need to rebuild fiscal buffers.
Fifth, despite the tight monetary policy, financial conditions have eased in many countries. Unless properly managed, this could trigger a sharp repricing of risk, especially for emerging markets, that would appreciate further the US dollar, trigger capital outflows, and increase borrowing costs and debt distress.
Policy Responses: If inflation continues to recede in response to existing tight monetary stance, there is little rationale for additional tightening. At the same time it should be stressed that premature monetary easing could waste the gains achieved thus far, particularly in the area of inflationary expectations. Once the disinflation process is firmly in place and inflation expectations have subsided, lowering policy rate would allow real interest rate to remain unchanged as long as inflation targets are observed.
Fiscal policy needs to support the monetary strategy and help the disinflation process. In 2022, fiscal and monetary policies were pulling in the same direction, as many of the pandemic emergency fiscal measures were implemented. In 2023, the degree of alignment has decreased. In some cases the fiscal stance has deteriorated substantially and became pro-cyclical, instead of focusing on rebuilding fiscal buffers (by removing energy subsidies inter alia).
Focus on the medium term is important. Medium term growth prospects are weak, especially for emerging market and developing economies. The implications are profound: a much slower convergence toward the living standards of advanced economies, reduced fiscal space, increased debt vulnerabilities and exposure to shocks, and diminished opportunities to overcome the scarring from the pandemic and the war.
With lower growth, higher interest rates, and reduced fiscal space, structural reforms become key. Higher long-term growth can be achieved through a careful sequence of structural reforms, especially those focused on governance, business regulations, and the external sector. These “first-generation” reforms can help unlock growth and make subsequent reforms— of credit markets or for the green transition—much more effective.
Countries should avoid implementing policies that contravene WTO rules, distort international trade and limit the flows agricultural commodities and goods critical for green transition. Coordinated efforts are needed to limit geo-economic fragmentation that prevents joint progress toward common goals in rules-based multilateral frameworks that enhance transparency and policy certainty and help foster a shared global prosperity.
Europe
Europe presently faces two challenges: First, taming the inflation pressures and restoring price stability; and second securing strong, sustainable green growth in the longer run while managing the impact of geo-economic fragmentation.
Global shifts resulting in geo-economic fragmentation and the impact of climate change have exacerbated the long-standing growth problems and could erode Europe’s competitiveness globally, as well as slow or even stalled income convergence within the EU and in all of Europe.
Cooling headline inflation is providing some relief to households and firms. Easing commodity prices and supply constraints have been mainly responsible, but persistent core inflation has proved more difficult to tackle.
Central banks across Europe have tightened their monetary policies substantially, and governments have started scaling back fiscal support. The lingering effects of last year’s energy price shocks and tighter macro policies are also contributing to a growth slowdown this year.
Overall, Europe’s growth forecast is shaped by the opposing forces of tighter macroeconomic policies and the gradual recovery in real incomes, as inflation falls and wages rise. The outlook for Europe predicts soft landing, with inflation declining gradually and growth slowly recovering from 1.3 percent in 2023 (down from 2.7 percent in 2022) to 1.5 percent in 2024.
Within the advanced European economies, countries with larger manufacturing or energy-intensive sectors slowed down more and experience slower recovery than economies that rely more on services and tourism. In addition, Germany and other countries with large manufacturing sectors also face low external demand and both direct and indirect effects of geo-economic fragmentation. Hence, German GDP is estimated to decline by 0.5 percent this year and stabilize around 0.9 annual GDP growth rate during 2024-28 period, lagging 0.4-0.5 percent annually behind European average in the base case scenario.
Similarly, European emerging market economies will experience a mild recovery in 2024, but the extent will vary across countries depending on the energy intensity of production, service sector orientation, and disruption of trade flows caused by the Russian invasion of Ukraine.
Monetary policy is approaching the end of the tightening cycle with an assumption that inflationary expectations have been reversed and consumer price inflation will continue to slow down from 8.4 percent in 2022 to an estimated 5.6 percent this year, and further down to 3.3 percent in 2024. The estimates for 2023 inflation have been revised recently down to 2.4 percent based on Eurostat November flash estimate. This average reflects a much faster decline in energy prices than previously estimated (from -5.6 to -11.5 percent), significant slowing down of inflation in food (from 11.6 to 6.9 percent) and industrial good (from 5.5 to 2.9 percent), and a modestly lower inflation in services (from 5.4 to 4.0 percent). It should be noted, though, that revised inflation estimates for 2023 imply a much more modest reduction in inflation rate excluding energy: from 6.8 to 4.3 percent.
Despite these welcome improvements in fighting inflation, full price stability (i.e. core inflation below 2 percent) is not likely to be achieved and sustained in the medium run before 2025.
Lower core inflation will be driven by subdued domestic demand and lower commodity prices. On the other hand, the pace of disinflation will be slowed by the projected recovery in real incomes and still-strong labor markets. Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies.
A moderate fiscal consolidation introduced in 2023 is expected to be maintained in 2024-25 to secure full price stability in tandem with monetary policy.
With premature monetary easing, real wage increases and insufficient fiscal consolidation, inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation.
Europe is facing these combined risks at a time when structural shifts from geopolitical and geo-economic fragmentation and climate change are compounding already-existing long-term growth problems.
Europe’s medium-term growth prospects have declined for some time, with weakening productivity growth as the key factor. The new challenges of higher and more volatile energy costs, disruptions in trade relationships and production value chains combined with well-known old constraints (of population aging and inadequate labor supply) can stall potential growth. Weak productivity and loss of wage-cost competitiveness may undermine stability and economic convergence as the main motivational factors (“the European dream”) for most European emerging market economies.
It is, therefore, crucial to sustain economic policies aimed at restoring price stability and strengthen economic fundamentals. Empirical evidence suggests it takes several years for inflation to return to normal levels after an inflationary episode. Maintaining a restrictive monetary policy stance is thus paramount to securing the return of inflation to target within a reasonable timeframe.
Uncertainty about inflation persistence is large, and the cost of easing too early is substantial. Monetary policy should be adjusted to country circumstances, and policy rates should remain high for some time. It is essential that at the same time countries rebuild and/or preserve fiscal buffers while protecting budget expenditures aimed at meeting critical spending needs.
Untargeted energy subsidies and financing of inefficiencies should be phased out. In addition to these savings, eligible EU economies should strengthen their capacity to effectively utilize EU grants for priority spending on climate-resilient infrastructure, social protection, and green transition. The remaining spending needs on education, health, infrastructure, and climate change may have to be financed from fiscal deficits projected to increase over the medium term in most European emerging market economies.
Macro financial policies should ensure banks utilize their profits from rising net interest margins to raise capital buffers to absorb the shocks and headwinds in the real estate sector.
Structural policies remain crucial for achieving strong, green, and evenly distributed growth. Reforms should focus on removing barriers to economic innovation, dynamic investment and R&D which enhance competition that increases productivity.
European emerging market economies require improved public finance management and public sector governance in general.
To counter geo-economic fragmentation (GEF), Europe needs to efficient single market as its most important growth asset to countervail GEF forces, increase efficiency and productivity, and facilitate the green transition. Policies promoting these objectives must be designed carefully and deployed with surgical precision and with care to avoiding costly subsidy races or use restrictions (rationing) and distortionary protections measures (tariffs).
Western Balkans
In the context of weakening global demand, disruptions in trade flows, deep energy and food crises triggered by the pandemic and Russian invasion of Ukraine, economic growth in the Western Balkans (WB) decelerated over the course of 2022 and into 2023. The slowdown had a divergent impact across the WB region. Global disruptions contributed to weaker-than expected performance of industrial production in the whole European Union (EU) and the WB. Service sectors proved more resilient and quickly recovered in 2021-2023. This has particularly benefited Albania, Kosovo, and Montenegro, where services exports (from tourism) have reached new record highs. By contrast, weaker demand for goods has weighed heavily on Bosnia and Herzegovina (BiH), North Macedonia and Serbia.
On the demand side, private consumption remained an important growth driver, despite rising consumer prices.
The labor market continued to strengthen in 2023, against all odds, but cooling is under way in some countries. The average employment rate for the Western Balkans reached a historical high of 47.8 percent in June 2023.
On a regional level, all sectors except agriculture contributed new jobs to the labor market. In 2023 labor shortages continued to be among top concerns raised by businesses in the WB region. Unemployment declined in all countries, except in Serbia.
The labor market recovery benefited vulnerable groups—youth and women. The youth unemployment rate declined to 22.7 percent in mid-2023, the lowest rate on record, but still lags considerably behind the 14.3 percent EU27 average for June 2023. Wage pressures, combined with growth headwinds, are likely to slow the pace of private sector hiring in the future.
Poverty rates are estimated to decline at a slower pace due to low labor force participation rates and high inflation eroding real incomes.
All WB countries recorded strong year-on-year (yoy) growth of nominal fiscal revenues, with large country variation in budget expenditures subject to political and social pressures. As a result, all WB countries are expected to continue running fiscal deficits in 2023 close to their 2021 levels, maintain elevated social protection expenditures, and spend more on public wages.
Given that revenue increases came mostly from inflation, and less from the expansion of the revenue base, WB countries may face higher budget rigidity and less room for maneuver to reprioritize their budgets. The fiscal space has been eroded by inflation-driven indexation of pensions and wages and rising cost of external financing.
Inflation in the WB region is easing, although underlying price pressures persist. After peaking in October 2022 at 15 percent, average consumer price inflation in the WB6 countries has been on a downward trend, reaching 8.4 percent in July 2023. Core inflation also remains high, at above 5 percent.
With some country variation, continued inflation persistence reflects strong domestic demand, a high pass-through of past headline shocks into core inflation, the lagged effects of crisis response programs, and the strength of labor markets and wage growth from the second half of 2022. WB countries with independent monetary policy increased policy rates throughout 2023, albeit real policy rates remained negative.
The financial sector remained stable and resilient to increasing risks. The share of non-performing loans (NPLs) continued to decline to a historical low (3.9 percent) in June 2023, while profitability exceeded pre-pandemic levels and contributed to capital buffers. Despite strong current performance, the financial sector asset quality remains under stress with a growing share of potentially non-performing loans.
The current account deficit (CAD) for the WB region is expected to improve over the course of 2023 despite still elevated merchandise trade deficits due to lower exports from all WB countries except BiH. Net services and remittances continue to mitigate structural merchandise trade deficits, while net foreign direct investments (FDI) provide ample flows to fund the resulting CADs in most WB countries.
Economic growth is expected to decelerate across WB countries from 3.3 percent in 2022 to 2.5 percent in 2023 and then to gradually recover over the medium term to 3.5 percent on average (ranging from 3.0 percent for BiH to 4.0 percent for Serbia in 2028).
But risks remain high and tilted to the downside due to weak economic recovery in Europe, structural bottlenecks and continued need for a tight monetary policy to tame inflation pressures and overturn inflationary expectations.
The energy crisis has highlighted the importance of energy for growth. Specifically, the need to accelerate the green transition in key sectors (including agriculture), promote diversification of energy sources toward renewables and improve energy efficiency.
Growth promoting policies and reforms include those aimed at increasing market competition, attracting higher quality investments, removing barriers to greater labor force participation and gender equality, and accelerating regional integration.
Serbia
Taking into account some acceleration of the economic activity in the second half of the year, the annual GDP growth in 2023 is estimated to be around 2 percent, down from 2.3 percent in 2022. Growth rate is projected to gradually recover to 3.0 percent in 2024 and 3.8 percent in 2025, converging to medium term 4.0 percent ceiling in 2028.
Inflation has started to decline, but the average annual consumer price inflation for 2023 is now estimated at 12.4 percent – the highest in the WB region and among the highest in Europe (after Turkey with 51.2 percent, Hungary with 17.7 percent and Moldova with 13.3 percent). It is expected that CPI inflation will decline to eight percent by the year end and fall to 5.3 percent average for 2024. In 2025 average inflation is forecast to decline to 3.5 percent in, and then stabilize at 3.0 percent in 2028. Based on these projections, inflation could return to the NBS target band (3.0% ±1.5%) during 2024.
Fiscal performance in 2023 has been better than expected, with a lower-than-anticipated fiscal deficit (2.8 percent of GDP), thanks to strong revenue performance (more owed to inflation than active policy measures) and lower energy subsidies. Fiscal deficit is projected to decline to 2.0 percent of GDP in 2024 and further to 1.6 percent of GDP in 2025. These improvements are based on projected reduction of budget expenditures by around one percent of GDP every year, and a concurrent lower tax burden of about half a percent of GDP annually.
Public debt has plateaued at around 56 percent of GDP in mid-2023 and is expected to be reduced to 53 percent of GDP by the year end and further by about two percentage points annually in 2024 and 2025.
The 2023 CAD will be lower than originally expected (i.e. about 2.5 percent of GDP), but will widen to 3.4 and 4.3 percent of GDP respectively in 2024-25 due to projected growing trade deficit. The strong inflow of FDI recorded in 2023 is projected to continue over the medium run. As a result, foreign currency reserves have increased to a record high EUR 24 billion.
External debt as a percent of GDP declined from 67.9 in 2022, to 64.3 this year, and is projected to further decline to 61.1 and 59.7 percent of GDP in 2024-25.
Growth prospects: While growth projections over the medium term remain unchanged at 3-4 percent annually, those are still below potential growth rates that could be achieved through the right set of structural and institutional reforms. Possible new sources of growth could come from strategic FDIs in high value-added sectors.
Serbia’s economic outlook depends on geopolitical risks and energy sector developments, uncertainties over trading-partner growth (the EU and neighboring countries), resolution of efficiency and management issues in SOEs, successful taming of inflation pressures, and possible global financial market instability.
It is essential that a tight monetary policy stance is retained as long as needed and coupled with fiscal consolidation to observe deficit targets, rein in debt, rebuild fiscal buffers and sustain high level of public capital spending. Public sector wages and pensions should not be increased beyond the agreed fiscal rule. Public investment project should be evaluated based on financial and economic efficiency criteria, and managed in line with transparent public procurement rules.
Further efforts are needed to improve public financial management by advancing program budgeting and medium-term expenditure framework, better managing fiscal risks and public investment, and modernizing tax administration. One-off untargeted fiscal interventions (especially helicopter money and other politically motivated transfers) and energy subsidies should be avoided. They directly violate the principles of fiscal responsibility mentioned above and undermine the necessary joint monetary and fiscal policy efforts needed to tame inflation pressures, reverse inflationary expectations and reignite investor confidence.
A comprehensive strategy is needed to identify the main causes of slow labor and factor productivity growth and define a set of structural reforms and incentives to increase medium term growth and convergence to EU income levels. It is important to stress that these reforms are not needed just as EU accession requirement, but represent a necessary basis for better performance and economic prosperity, a basis for sustainable green growth and true resilience to major future risks.
The Serbian Association of Economists, as the organizer of the KBF, strives to sustain a network of influential stakeholders from all relevant fields and structure regular interactions through debates, dialogues, and knowledge sharing. Our vision is to become a true force for a better Serbia by creating consensus on fertile and feasible ideas that could help to overcome persistent economic problems and form a foundation of a sustainable economy converging to European Union income levels and social welfare.
Again, the choice to participate in the KBF 2024 is entirely yours!
We stand ready to welcome you at the XXXI Kopaonik Business Forum! Do come.
Program Committee of the Kopaonik Business Forum
XXXI Kopaonik Business Forum
The Kopaonik Business Forum (KBF) is a high-profile event committed to improving the performance of the Serbian economy through analytical contributions and dialogue between major relevant stakeholders. For more than a decade the event has enjoyed the conceptual patronage of the Prime Minister of the Republic of Serbia and attracted a significant number of participants from the region. Partnership with Mastercard company secures additional support in achieving greater visibility and enhancing the quality of this important event. Recently, the Forum has been gathering on average more than thousand participants annually, including heads of state, prime ministers and ministers, high representatives of regulatory bodies, representatives of international financial institutions, respectable scholars, diplomats, business practitioners, and media.
As usual, this year event is organized through plenary sessions, panel discussions, special events, and peer-to-peer sessions. Our exceptional roster includes close to two hundred speakers from academia (mostly economics, business management, and ICT), politics, finance, and business. Flagship thematic studies from IFIs will be presented again at the KBF along with new academic and policy papers by leading researchers and scholars in topical fields. The KBF continues to provide a unique opportunity for participants to meet and discuss relevant issues. The title of this year’s annual meeting is:
NEW GLOBAL CONTEXT:
CHALLENGES OF AN UNCERTAIN FUTURE
CHALLENGES OF AN UNCERTAIN FUTURE
KBF 2024 is again a four-day event.
Day Zero, Sunday March 3, is dedicated to macroeconomic analysis of recent developments in Serbia and to an outlook for the Western Balkan region in year 2024. Day Zero will also feature presentation of the most recent company reputation (KBF) index results, and short info on the status of the creative industry and Digital Serbia Initiative.
Day One, Monday March 4, will open with keynote addresses by the Serbian Governor of the Central Bank, and the Minister of Finance devoted to major macroeconomic (monetary and fiscal) policy developments in Serbia, followed by a Special Guest Speaker from the World Bank and an address by the IMF Mission Chief for Serbia. Afternoon sessions will start with a panel devoted to the future of the EU enlargement and the Western Balkans featuring leading diplomats and government and NGO officials. Day One afternoon will offer topical panels on: advanced digital cooperation, climate change, regional economic cooperation, skills mismatch crisis in the Serbian labor market, cashless economy, and artificial intelligence. Late afternoon and evening sessions will cover topics such as: automotive industry, insurance industry, the challenges of Serbian economy (as seen by investors), and green transition plan for Serbia. The Day One will conclude with the online address of Special Guest of KBF, prof. Jeffrey Sachs, Director of the Center for Sustainable Development at Columbia University.
Day Two, Tuesday March 5, will start with plenary session contributions from Minister of Science and Tax revenue service Director, and continue with following panels: road to energy transition, infrastructure development, and digital transformation of the finance industry. In addition, you will have an opportunity to listen panels on the competitiveness of small and medium size export-oriented sector, human capital development, bringing circularity to life, future without workers, and women of change. Afternoon panels will elaborate on the role of sport in business and society, and the new trends in education 4.0. Evening panels will cover the banking sector, sustainable agriculture, and the news in real estate development. KBF will present four young entrepreneurs, and their path to success. The Day Two will conclude with a hard-talk interview with Mr. Miroslav Mišković, the biggest private investor in Serbia.
Day Three, Wednesday March 6, will start with a plenary session, expecting contributions from government and WHO officials, and continue with panels on gender equality issues, youth friendly policies and business practices, battle for talents and rethinking health financing based on data. The KBF will conclude with an interview with Prime Minister Ana Brnabić and closing remarks by the President of SES.
The 2024 Forum takes place in an exceptionally complex geopolitical and geo-economic situation, appropriately labeled “poly crisis” – a situation characterized by multiple concurrent crises with different causes, and distinctly different logic and possible solutions.
On the economic side, recent experience with multiple crises can be traced back to 2008 financial crisis which expanded into global economic and trade crisis. On the geopolitical side, it included Russian military intervention against Georgia. On the health side, it was marked by a swine flu epidemic in 2008/9.
A new conflagration of crises that form the present “global poly crisis” was initiated by the pandemic in 2020, followed by the Russian aggression against Ukraine in early 2022 and the ensuing energy crisis, and food and cost-of living crises on a global scale. Most recently, the Middle East war exacerbated geopolitical tensions to a new high to further deepen the “poly crisis”.
Less visible but equally worrisome dimensions of the “poly crisis” include acute environmental concerns, geo-economic fragmentations (GEF), and the (positive and negative) disruptions from the fast growing generative artificial intelligence (AI).
World: Resilient Global Economy Still Trails Pre-pandemic Performance
The global economy continues to recover from the pandemic and shocks unleashed by Russia’s invasion of Ukraine, the energy, and the cost-of-living crisis. In retrospect, the resilience of the global economy has been remarkable. Heavy disruptions in energy, commodity and food markets caused by the war, and monetary tightening had slowed economic growth. But it did not cause global recession.
Serious growth and macroeconomic stability challenges still lie ahead. Global economic activity bottomed out at the end of 2022, but full recovery to pre-pandemic levels of GDP and price stability still remain out of reach. This is particularly true for emerging and developing countries.
Based on the IMF’s October 2023 projections, global GDP growth will slow from 3.5 percent recorded in 2022 to 3.0 percent in 2023, and 2.9 percent in 2024. This is well below the 3.8 percent historical average recorded during 2000-2019 period.
The advanced economies are expected to slow down from 2.6 percent growth in 2022 to 1.5 percent in 2023 and further to 1.4 percent in 2024. These projections reflect stronger growth dynamics in the US and weaker expected growth in the EU. Namely, the US economy is now forecast to retain the same 2.1 percent growth in 2022 and 2023, and slow down to 1.5 percent in 2024. By contrast, GDP growth in the EU is forecast to drop from 3.3 percent in 2022 to only 0.7 percent in 2023, and only mildly recover to 1.2 percent in 2024. Poor EU growth performance is mainly due to expected 0.5 percent German GDP decline in 2023 and a weak 0.9 percent growth in 2024.
Emerging market and developing economies are projected to have a marginally lower 4.0 percent GDP growth in 2023 and 2024 compared to 4.1 percent growth achieved in 2022, reflecting both global disruptions and continued property sector crisis in China.
Mediocre Medium Term Growth Prospects: International financial and development institutions and more than 100 private and public economic forecasting institutions all agree that the next medium term will be marked by the lowest expected GDP growth in decades with adverse prospects for higher living standards and income convergence.
The latest World Economic Outlook (WEO) forecasts global growth in 2028 at 3.1 percent, compared to 3.6 percent medium term growth expected in early 2020 just before the pandemic, and 4.9 percent projected before the onset of the global financial crisis in 2008. Medium term forecast for advanced economies stands at 1.7 percent GDP growth in 2028, and 3.9 percent for emerging and developing economies. Per capita GDP growth projections for advanced economies follow the same declining pattern. This confirms that declining population is not the cause of slower growth, but rather lower capital accumulation per worker, slower total factor productivity growth and slowdown in labor force participation in advanced economies.
Weaker growth prospects are likely to adversely affect income convergence across economies, and make it more difficult to build and sustain fiscal buffers needed to respond to challenges posed by the shock-prone world, and to attract (crowd in) needed investments.
Overall, based on current policies and structural weaknesses, a full recovery of global output to pre-pandemic level seems very unlikely in the medium term. The latest medium term projections imply a global output loss of some 5.0 percent of GDP. In terms of constant 2023 US Dollars, output loss will range from $4.5 trillion in 2024 to about $6.4 trillion in 2028.
Global inflation is forecast to decline steadily. Headline inflation (year-on-year) decelerated from 9.2 percent in 2022 to 5.9 percent in 2023 and 4.8 percent in 2024. Core inflation, excluding food and energy prices, is also projected to decline, albeit more gradually than headline inflation.
These projections are increasingly consistent with a “soft landing” scenario which relies on disinflation policies without a strong downturn in economic activity and an increase in unemployment.
It should be noted that despite good results in taming inflation, recent inflation estimates for 2023 and forecasts for 2024 have been revised upwards indicating that inflation pressures persist. Return to low inflation targets is not likely until 2025 in most cases.
Three global underlying forces are currently at play.
First, the recovery in service sectors is almost complete. Strong consumer demand benefited service-oriented economies more than traditional manufacturing powerhouses. High demand for labor-intensive services also translated into tighter labor markets, higher wages and more persistent services inflation. These trends will be reversed in 2024 returning to more balanced service and manufacturing dynamics, and related labor market and real wage developments.
Second, part of the growth slowdown is caused by tighter monetary policy. The transmission channels and impact (through tighter credit conditions, housing markets, investment, and economic activity) are uneven across countries.
Third, inflation and economic activity are shaped by past commodity price shocks. Economies exposed to higher increase in imported energy prices often experienced a stronger pass-through and a sharper economic slowdown.
Risks going forward: While some of the extreme risks—such as severe banking instability—have moderated since April, the balance remains tilted to the downside.
First, the real estate crisis in China is not over and represent an important risk for the global economy. The underlying policy challenge in restoring confidence is complex. It requires prompt restructuring struggling property developers while preserving financial stability and national and local level.
Second, geopolitical tensions and disruptions related to climate change could trigger new volatility of commodity prices with adverse consequences on economic growth, inflation, financial stability and investor confidence.
Third, while both underlying and headline inflation have decreased, they remain uncomfortably high. Near-term inflation expectations have risen markedly above target. Bringing these near-term inflation expectations back down below target is of paramount importance in taming inflation.
Time is of essence here as tight labor markets, ample excess savings in some countries, and adverse energy price developments could give rise to more entrenched inflation mechanisms, requiring forceful action from central banks with negative impact on growth and employment.
Fourth, fiscal buffers have been eroded (or depleted) in many countries due to fiscal interventions during the pandemic and ensuing slower growth. With elevated debt levels, rising funding costs, slowing growth, and a gap between the growing demands on the state services and available fiscal resources, there is an acute need to rebuild fiscal buffers.
Fifth, despite the tight monetary policy, financial conditions have eased in many countries. Unless properly managed, this could trigger a sharp repricing of risk, especially for emerging markets, that would appreciate further the US dollar, trigger capital outflows, and increase borrowing costs and debt distress.
Policy Responses: If inflation continues to recede in response to existing tight monetary stance, there is little rationale for additional tightening. At the same time it should be stressed that premature monetary easing could waste the gains achieved thus far, particularly in the area of inflationary expectations. Once the disinflation process is firmly in place and inflation expectations have subsided, lowering policy rate would allow real interest rate to remain unchanged as long as inflation targets are observed.
Fiscal policy needs to support the monetary strategy and help the disinflation process. In 2022, fiscal and monetary policies were pulling in the same direction, as many of the pandemic emergency fiscal measures were implemented. In 2023, the degree of alignment has decreased. In some cases the fiscal stance has deteriorated substantially and became pro-cyclical, instead of focusing on rebuilding fiscal buffers (by removing energy subsidies inter alia).
Focus on the medium term is important. Medium term growth prospects are weak, especially for emerging market and developing economies. The implications are profound: a much slower convergence toward the living standards of advanced economies, reduced fiscal space, increased debt vulnerabilities and exposure to shocks, and diminished opportunities to overcome the scarring from the pandemic and the war.
With lower growth, higher interest rates, and reduced fiscal space, structural reforms become key. Higher long-term growth can be achieved through a careful sequence of structural reforms, especially those focused on governance, business regulations, and the external sector. These “first-generation” reforms can help unlock growth and make subsequent reforms— of credit markets or for the green transition—much more effective.
Countries should avoid implementing policies that contravene WTO rules, distort international trade and limit the flows agricultural commodities and goods critical for green transition. Coordinated efforts are needed to limit geo-economic fragmentation that prevents joint progress toward common goals in rules-based multilateral frameworks that enhance transparency and policy certainty and help foster a shared global prosperity.
| Box 1: Macroeconomic effects of AI The astonishing technical advances in the development of AI over the past few years indicate its growing potential for a positive impact on the economy and society. Three broad areas of particular macroeconomic interest include the impact on: productivity growth, labor market dynamics, and industrial concentration. The path of future AI development and impact will critically depend on technological, institutional and policy choices made today in each of these areas. Productivity growth: The future of economic growth hinges on productivity growth of labor and other factors as well. Most countries experience the same problem of low productivity growth (measured as output to all factor inputs). Higher productivity growth can help control budget deficits, reduce poverty, improve health care and education, build infrastructure and better manage the environment. Low productivity future scenario: Despite the rapidly improving technical capabilities, AI can lead to low-productivity future if
In this scenario, most constraints are removed or softened to enable: fast adoption of AI related innovations across all firms; promotion of labor-enhancing technologies; improved leveraging through organizational and managerial changes; removal of legal constraints and limitations imposed by rigid intellectual property laws; and more reasonable actions of national regulators. Income inequality Increasing income inequality between individual workers has become a major concern. Empirical research indicates that two factors caused increasing inequality: First, use of automation and computers, and second, outsourcing of a large portion of manufacturing jobs to emerging and developing lower income countries (in East and South Asia, Latin America and transition economies). The first factor tended to replace middle-income professional jobs with automated machines and computers, leaving higher relative shares of low-paid simple jobs and high-paid professional and managerial jobs. And this translated into growing income inequality which started in the 1970’s. The second factor moved the entire block of jobs (except senior management and corporate staff) to lower income countries creating a loss of high-professional and mid-management positions in advanced economies. This factor further amplified income inequality albeit the process was subdued until the stronger advances in globalization in the late 1980’s. Going forward, one can see two scenarios of AI influence on inequality. In the higher-inequality scenario, AI is controlled by technical staff and managers who tend to use AI solutions to replace driving down wages and employment. New generative AI expands this impact on a range of intellectual services and art. NBy substituting for high and well-paying jobs, AI increases inequality in this scenario. In the lower-inequality scenario, AI is used to help young workers, enhance their learning, and complement experienced staff to do their jobs more productively by using AI assistant models (such as Copilot). With proper incentives they can use their time on other more creative things leading to higher productivity of the firm and shared gains for everybody. Industrial concentration Since the early 1980s, industrial concentration has risen in advanced economies. In the higher-concentration future, only the largest firms intensively use AI in their core business. Customized AI models become ever more expensive to develop and only the largest firms can afford the high cost. Hence, concentration further increases. Small firms cannot afford AI models which further erodes their efficiency and competitiveness. In a lower-concentration future, open source AI models become widely available and affordable by small companies. In addition, based on leaked research results, relatively cheap open-source models are faster, easier to customize, more private, and more capable for the price than expensive proprietary models. Open-source models can be applied by many people and “data trained” more cheaply. Thus, without barriers and restriction, open-source AI may end up dominating the expensive proprietary models. This may encourage decentralized AI innovation and help reach a turning point in 40-year long rise in industrial and service concentration. It is important to note that in all three cases simple, low-resistant choices lead to inferior outcomes: low productivity growth, higher income inequality, and higher industrial concentration. Getting to the good side of the productivity, inequality, and concentration triad will require hard work and smart policy interventions that help shape the future of technology and the economy by steering AI in the direction of complementing rather than replacing human labor, sharing productivity gains across all skills, and allowing broad access to inexpensive open source AI models. |
Europe
Europe presently faces two challenges: First, taming the inflation pressures and restoring price stability; and second securing strong, sustainable green growth in the longer run while managing the impact of geo-economic fragmentation.
Global shifts resulting in geo-economic fragmentation and the impact of climate change have exacerbated the long-standing growth problems and could erode Europe’s competitiveness globally, as well as slow or even stalled income convergence within the EU and in all of Europe.
Cooling headline inflation is providing some relief to households and firms. Easing commodity prices and supply constraints have been mainly responsible, but persistent core inflation has proved more difficult to tackle.
Central banks across Europe have tightened their monetary policies substantially, and governments have started scaling back fiscal support. The lingering effects of last year’s energy price shocks and tighter macro policies are also contributing to a growth slowdown this year.
Overall, Europe’s growth forecast is shaped by the opposing forces of tighter macroeconomic policies and the gradual recovery in real incomes, as inflation falls and wages rise. The outlook for Europe predicts soft landing, with inflation declining gradually and growth slowly recovering from 1.3 percent in 2023 (down from 2.7 percent in 2022) to 1.5 percent in 2024.
Within the advanced European economies, countries with larger manufacturing or energy-intensive sectors slowed down more and experience slower recovery than economies that rely more on services and tourism. In addition, Germany and other countries with large manufacturing sectors also face low external demand and both direct and indirect effects of geo-economic fragmentation. Hence, German GDP is estimated to decline by 0.5 percent this year and stabilize around 0.9 annual GDP growth rate during 2024-28 period, lagging 0.4-0.5 percent annually behind European average in the base case scenario.
Similarly, European emerging market economies will experience a mild recovery in 2024, but the extent will vary across countries depending on the energy intensity of production, service sector orientation, and disruption of trade flows caused by the Russian invasion of Ukraine.
Monetary policy is approaching the end of the tightening cycle with an assumption that inflationary expectations have been reversed and consumer price inflation will continue to slow down from 8.4 percent in 2022 to an estimated 5.6 percent this year, and further down to 3.3 percent in 2024. The estimates for 2023 inflation have been revised recently down to 2.4 percent based on Eurostat November flash estimate. This average reflects a much faster decline in energy prices than previously estimated (from -5.6 to -11.5 percent), significant slowing down of inflation in food (from 11.6 to 6.9 percent) and industrial good (from 5.5 to 2.9 percent), and a modestly lower inflation in services (from 5.4 to 4.0 percent). It should be noted, though, that revised inflation estimates for 2023 imply a much more modest reduction in inflation rate excluding energy: from 6.8 to 4.3 percent.
Despite these welcome improvements in fighting inflation, full price stability (i.e. core inflation below 2 percent) is not likely to be achieved and sustained in the medium run before 2025.
Lower core inflation will be driven by subdued domestic demand and lower commodity prices. On the other hand, the pace of disinflation will be slowed by the projected recovery in real incomes and still-strong labor markets. Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies.
A moderate fiscal consolidation introduced in 2023 is expected to be maintained in 2024-25 to secure full price stability in tandem with monetary policy.
With premature monetary easing, real wage increases and insufficient fiscal consolidation, inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation.
Europe is facing these combined risks at a time when structural shifts from geopolitical and geo-economic fragmentation and climate change are compounding already-existing long-term growth problems.
Europe’s medium-term growth prospects have declined for some time, with weakening productivity growth as the key factor. The new challenges of higher and more volatile energy costs, disruptions in trade relationships and production value chains combined with well-known old constraints (of population aging and inadequate labor supply) can stall potential growth. Weak productivity and loss of wage-cost competitiveness may undermine stability and economic convergence as the main motivational factors (“the European dream”) for most European emerging market economies.
It is, therefore, crucial to sustain economic policies aimed at restoring price stability and strengthen economic fundamentals. Empirical evidence suggests it takes several years for inflation to return to normal levels after an inflationary episode. Maintaining a restrictive monetary policy stance is thus paramount to securing the return of inflation to target within a reasonable timeframe.
Uncertainty about inflation persistence is large, and the cost of easing too early is substantial. Monetary policy should be adjusted to country circumstances, and policy rates should remain high for some time. It is essential that at the same time countries rebuild and/or preserve fiscal buffers while protecting budget expenditures aimed at meeting critical spending needs.
Untargeted energy subsidies and financing of inefficiencies should be phased out. In addition to these savings, eligible EU economies should strengthen their capacity to effectively utilize EU grants for priority spending on climate-resilient infrastructure, social protection, and green transition. The remaining spending needs on education, health, infrastructure, and climate change may have to be financed from fiscal deficits projected to increase over the medium term in most European emerging market economies.
Macro financial policies should ensure banks utilize their profits from rising net interest margins to raise capital buffers to absorb the shocks and headwinds in the real estate sector.
Structural policies remain crucial for achieving strong, green, and evenly distributed growth. Reforms should focus on removing barriers to economic innovation, dynamic investment and R&D which enhance competition that increases productivity.
European emerging market economies require improved public finance management and public sector governance in general.
To counter geo-economic fragmentation (GEF), Europe needs to efficient single market as its most important growth asset to countervail GEF forces, increase efficiency and productivity, and facilitate the green transition. Policies promoting these objectives must be designed carefully and deployed with surgical precision and with care to avoiding costly subsidy races or use restrictions (rationing) and distortionary protections measures (tariffs).
| Box 2: Europe in a Fragmented World IMFs recent research emphasized that the pandemic and Russia’s war in Ukraine revealed the risks inherent in a deeply interdependent world. The pandemic disrupted supply chains and led to shortages and price surges, raising questions about the reliability of global trade. The war triggered a severe energy crisis and exposed vulnerabilities of interdependence. Growing tensions the US and China are further complicating the global economic relations which are now increasingly dictated by national and supply chain security considerations. As a result, policymakers now give much higher consideration to resilience and protection which favors policies that support geo-economic fragmentation (GEF) and could severely damage global prosperity and, in the end, be counterproductive and actually weaken security. GEF is increasingly becoming a reality. Trade within politically aligned blocs of countries has been growing 1½ percentage points faster than trade across blocs. The EU is exceptionally exposed to fragmentation, but also well prepared to deal with it based on its diverse membership and scope for efficient EU-based supply chains. Presently, GEF is hurting most Germany and many EU countries dependent on energy imports and competitive exports. To reverse this setback and properly leverage the unique features of the EU, policy makers should deepen the single European market while also advocating the rules-based global trading system. |
Western Balkans
In the context of weakening global demand, disruptions in trade flows, deep energy and food crises triggered by the pandemic and Russian invasion of Ukraine, economic growth in the Western Balkans (WB) decelerated over the course of 2022 and into 2023. The slowdown had a divergent impact across the WB region. Global disruptions contributed to weaker-than expected performance of industrial production in the whole European Union (EU) and the WB. Service sectors proved more resilient and quickly recovered in 2021-2023. This has particularly benefited Albania, Kosovo, and Montenegro, where services exports (from tourism) have reached new record highs. By contrast, weaker demand for goods has weighed heavily on Bosnia and Herzegovina (BiH), North Macedonia and Serbia.
On the demand side, private consumption remained an important growth driver, despite rising consumer prices.
The labor market continued to strengthen in 2023, against all odds, but cooling is under way in some countries. The average employment rate for the Western Balkans reached a historical high of 47.8 percent in June 2023.
On a regional level, all sectors except agriculture contributed new jobs to the labor market. In 2023 labor shortages continued to be among top concerns raised by businesses in the WB region. Unemployment declined in all countries, except in Serbia.
The labor market recovery benefited vulnerable groups—youth and women. The youth unemployment rate declined to 22.7 percent in mid-2023, the lowest rate on record, but still lags considerably behind the 14.3 percent EU27 average for June 2023. Wage pressures, combined with growth headwinds, are likely to slow the pace of private sector hiring in the future.
Poverty rates are estimated to decline at a slower pace due to low labor force participation rates and high inflation eroding real incomes.
All WB countries recorded strong year-on-year (yoy) growth of nominal fiscal revenues, with large country variation in budget expenditures subject to political and social pressures. As a result, all WB countries are expected to continue running fiscal deficits in 2023 close to their 2021 levels, maintain elevated social protection expenditures, and spend more on public wages.
Given that revenue increases came mostly from inflation, and less from the expansion of the revenue base, WB countries may face higher budget rigidity and less room for maneuver to reprioritize their budgets. The fiscal space has been eroded by inflation-driven indexation of pensions and wages and rising cost of external financing.
Inflation in the WB region is easing, although underlying price pressures persist. After peaking in October 2022 at 15 percent, average consumer price inflation in the WB6 countries has been on a downward trend, reaching 8.4 percent in July 2023. Core inflation also remains high, at above 5 percent.
With some country variation, continued inflation persistence reflects strong domestic demand, a high pass-through of past headline shocks into core inflation, the lagged effects of crisis response programs, and the strength of labor markets and wage growth from the second half of 2022. WB countries with independent monetary policy increased policy rates throughout 2023, albeit real policy rates remained negative.
The financial sector remained stable and resilient to increasing risks. The share of non-performing loans (NPLs) continued to decline to a historical low (3.9 percent) in June 2023, while profitability exceeded pre-pandemic levels and contributed to capital buffers. Despite strong current performance, the financial sector asset quality remains under stress with a growing share of potentially non-performing loans.
The current account deficit (CAD) for the WB region is expected to improve over the course of 2023 despite still elevated merchandise trade deficits due to lower exports from all WB countries except BiH. Net services and remittances continue to mitigate structural merchandise trade deficits, while net foreign direct investments (FDI) provide ample flows to fund the resulting CADs in most WB countries.
Economic growth is expected to decelerate across WB countries from 3.3 percent in 2022 to 2.5 percent in 2023 and then to gradually recover over the medium term to 3.5 percent on average (ranging from 3.0 percent for BiH to 4.0 percent for Serbia in 2028).
But risks remain high and tilted to the downside due to weak economic recovery in Europe, structural bottlenecks and continued need for a tight monetary policy to tame inflation pressures and overturn inflationary expectations.
The energy crisis has highlighted the importance of energy for growth. Specifically, the need to accelerate the green transition in key sectors (including agriculture), promote diversification of energy sources toward renewables and improve energy efficiency.
Growth promoting policies and reforms include those aimed at increasing market competition, attracting higher quality investments, removing barriers to greater labor force participation and gender equality, and accelerating regional integration.
Serbia
Taking into account some acceleration of the economic activity in the second half of the year, the annual GDP growth in 2023 is estimated to be around 2 percent, down from 2.3 percent in 2022. Growth rate is projected to gradually recover to 3.0 percent in 2024 and 3.8 percent in 2025, converging to medium term 4.0 percent ceiling in 2028.
Inflation has started to decline, but the average annual consumer price inflation for 2023 is now estimated at 12.4 percent – the highest in the WB region and among the highest in Europe (after Turkey with 51.2 percent, Hungary with 17.7 percent and Moldova with 13.3 percent). It is expected that CPI inflation will decline to eight percent by the year end and fall to 5.3 percent average for 2024. In 2025 average inflation is forecast to decline to 3.5 percent in, and then stabilize at 3.0 percent in 2028. Based on these projections, inflation could return to the NBS target band (3.0% ±1.5%) during 2024.
Fiscal performance in 2023 has been better than expected, with a lower-than-anticipated fiscal deficit (2.8 percent of GDP), thanks to strong revenue performance (more owed to inflation than active policy measures) and lower energy subsidies. Fiscal deficit is projected to decline to 2.0 percent of GDP in 2024 and further to 1.6 percent of GDP in 2025. These improvements are based on projected reduction of budget expenditures by around one percent of GDP every year, and a concurrent lower tax burden of about half a percent of GDP annually.
Public debt has plateaued at around 56 percent of GDP in mid-2023 and is expected to be reduced to 53 percent of GDP by the year end and further by about two percentage points annually in 2024 and 2025.
The 2023 CAD will be lower than originally expected (i.e. about 2.5 percent of GDP), but will widen to 3.4 and 4.3 percent of GDP respectively in 2024-25 due to projected growing trade deficit. The strong inflow of FDI recorded in 2023 is projected to continue over the medium run. As a result, foreign currency reserves have increased to a record high EUR 24 billion.
External debt as a percent of GDP declined from 67.9 in 2022, to 64.3 this year, and is projected to further decline to 61.1 and 59.7 percent of GDP in 2024-25.
Growth prospects: While growth projections over the medium term remain unchanged at 3-4 percent annually, those are still below potential growth rates that could be achieved through the right set of structural and institutional reforms. Possible new sources of growth could come from strategic FDIs in high value-added sectors.
Serbia’s economic outlook depends on geopolitical risks and energy sector developments, uncertainties over trading-partner growth (the EU and neighboring countries), resolution of efficiency and management issues in SOEs, successful taming of inflation pressures, and possible global financial market instability.
It is essential that a tight monetary policy stance is retained as long as needed and coupled with fiscal consolidation to observe deficit targets, rein in debt, rebuild fiscal buffers and sustain high level of public capital spending. Public sector wages and pensions should not be increased beyond the agreed fiscal rule. Public investment project should be evaluated based on financial and economic efficiency criteria, and managed in line with transparent public procurement rules.
Further efforts are needed to improve public financial management by advancing program budgeting and medium-term expenditure framework, better managing fiscal risks and public investment, and modernizing tax administration. One-off untargeted fiscal interventions (especially helicopter money and other politically motivated transfers) and energy subsidies should be avoided. They directly violate the principles of fiscal responsibility mentioned above and undermine the necessary joint monetary and fiscal policy efforts needed to tame inflation pressures, reverse inflationary expectations and reignite investor confidence.
A comprehensive strategy is needed to identify the main causes of slow labor and factor productivity growth and define a set of structural reforms and incentives to increase medium term growth and convergence to EU income levels. It is important to stress that these reforms are not needed just as EU accession requirement, but represent a necessary basis for better performance and economic prosperity, a basis for sustainable green growth and true resilience to major future risks.
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In conclusion, we would like to stress that the true spirit and tradition of the KBF is to promote bold ideas that can help us better understand the challenges and opportunities connected with sustainable development agenda. The aim of the KBF 2024 is to motivate all participants to understand and actively shape the emerging economic and business ecosystem striving to embark on an innovation-driven global economy based on universal mobility.The Serbian Association of Economists, as the organizer of the KBF, strives to sustain a network of influential stakeholders from all relevant fields and structure regular interactions through debates, dialogues, and knowledge sharing. Our vision is to become a true force for a better Serbia by creating consensus on fertile and feasible ideas that could help to overcome persistent economic problems and form a foundation of a sustainable economy converging to European Union income levels and social welfare.
Again, the choice to participate in the KBF 2024 is entirely yours!
We stand ready to welcome you at the XXXI Kopaonik Business Forum! Do come.
Program Committee of the Kopaonik Business Forum
