Serbia sets up red flags for investors – Will there be no investments in 2014 due to elections?

While politicians were deciding whether or not to participate in elections, investors were considering whether to invest or not. Elections were announced and investments stopped.

Austrian Vossloh Kiepe was planning to start production of air-conditioning devices for rail vehicles in free zone in Novi Sad but according to the Vienna daily WirtschaftsBlatt, it delayed construction due to early parliamentary elections.

Are other investments also halted due to elections? How much foreign capital will arrive in 2014? Are the investments halted because the government has not been providing subsidies since last year? To what extent did the failure to adopt crucial laws affect investors?

In the first 11 months of 2013, Serbia registered a net FDI inflow of only EUR 643 mil, and this year it needs at least EUR 1.7 billion as well as an arrangement with the IMF, experts of the magazine Makroekonomske analize i trendovi (Macroeconomic analysis and trends) stated yesterday.

They believe that early elections will postpone reforms and "push everything to the sideline" for minimum next half a year and that we cannot count on the inflow of foreign and domestic investment before June. They also say that the year 2014 is unlikely to bring about new investment, acceleration of economic growth, and increase in the employment rate.

Some German and American investors gave up as well

Investors agree that political stability is an important prerequisite when it comes to investing in a country. Although they hope elections in Serbia will contribute to that, they are still skeptical whether essential reforms will be implemented fast.

Representatives of the American Chamber of Commerce think elections will slow down new investors‘ arrival until the new Government is formed and the first indicators of readiness to quickly and decisively implement reforms promised in the election campaign become visible.

- American investors do not differ from other serious investors so they expect political stability in the country they are considering to invest in. Elections do not have to necessarily halt investments, especially when they are announcing consolidation of the Government ready for more decisive reforms, but they are always a kind of a red flag on the geographical map of the region which points to certain caution level for a specific destination – Maja Piscevic, director of the American Chamber of Commerce in Serbia, says to eKapiija.

Our collocutor mentions that investors in a late stage of negotiations, which is usually the most important, do not want their possible final decision to be communicated to the public in advance through the announcement of their arrival.

- Not a small number of investors gave up for irresponsible communication at this stage – Piscevic points out.

As eKapija was told by people at the German Chamber of Industry and Commerce in Serbia, three German companies gave up investing in our country and opted for Macedonia and Bulgaria.

- Serbia has serious competition in neighboring countries such as Romania, Macedonia, Bulgaria, and Montenegro. The problem is that politicians do not see that significant funds have been invested in the countries in the region and that some investors go to our neighbours – said the representatives of the German Chamber of Industry and Commerce in Serbia.

The organization believes that firms operating in Serbia and planning a capacity boost will continue to invest regardless of elections, but they see other reasons why companies give up.

Reforms together with subsidies

Investors complain about the Labor Law, Privatization Law, Bankruptcy Law, Law on Spatial Planning and Development, which were supposed to be adopted in January. With the elections in March, new legal solutions will be adopted with a delay of minimum half a year.

AmCham agrees that the readiness of the Government to implement necessary reforms is essential.

A research conducted among AmCham member companies in Q4 last year showed that subsidies are not a crucial factor when investors are deciding on whether to enter a country or increase their capacity and staff when already in the country.

Serbia has been providing high, direct incentives to foreign investors through subsidies ranging from EUR 4,000 - 10,000 per new job. However, last year, the state decided to halt subsidies but as it was announced, the Ministry of Economy will stick to the contracts which were already signed with investors which fulfill their commitments for which they were provided subsidies.

Although it has been announced that in the budget 2014, there is no funds for new subsides, in October last year, the Government of Serbia promised to the Finish PKC that it will sign contract on employment subsidies by February 2014. The Finish investor which should open a plant for production of cable systems for commercial vehicles in Smederevo, was promised EUR 7,5 mil of the state-owned funds as an incentive for employment of 1500 people with a payment in three installments in the next three years.

The contract has not been signed yet and the city administration of Smederevo says the government is working on the contract on subsidies which will be signed soon as well as that a group of employees is going to Poland for training.

Line with IMF for rating boost

An economist, Stojan Stamenkovic said yesterday at he presentation of the latest number of Macroeconomic analysis and trends that IMF engagement is essential for Serbia and that it it could not be signed before July which is likely to happen in the fall, not earlier.

Stamenkovic said that the IMF mission who is coming in February will not be accountable for negotiations on engagement but they will come to check the situation and provide recommendations on cost reduction. He pointed out that, with the IMF support, it is necessary to provide reprogram or debts refunding as well as that this engagement are a presumption of country’s rating increase and investment capital inflow.

The IMF’s condition will be amendments to the Labor Law, Law on bankruptcy and privatization and if we do not adopt all that, we should expect smaller portion of investments, minimal or zero economy growth and employment increase, experts of the Macroeconomic analysis and trends.

Finally, we should not forget to mention the announced investment of UAE which would, according to estimation of politicians and economists, solve many financial problems. The only thing necessary is EUR 3 billion to arrive.

Suzana Obradovic