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On behalf of the Serbian Association of Economists we are pleased to invite you to the
XXIX 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 many years the event has enjoyed the conceptual patronage of the Prime Minister of the Republic of Serbia and attracted an increasing number of participants from around the region. Partner of the KBF is Mastercard company, which secures additional support in achieving greater visibility and enhancing the quality of this important event. Recently the KBF has been gathering on average more than thousand participants, 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, the event is organized through plenary sessions, panel discussions, special events, and peer-to-peer sessions.  Our exceptional roster includes more than a hundred speakers from academia (mostly economics, business management, and ICT), politics, finance, and business. The IFIs thematic studies 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:
SERBIA 2030:
The Sustainable Development Agenda

KBF 2022 is again a four-day event.

Day Zero, Sunday March 6, is dedicated to macroeconomic analysis and prediction for the year 2022 for the Western Balkan region, as well as Serbia. Day Zero will be rounded up with the panel traditionally designated to the Digital Serbia Initiative. Day One, Monday March 7, is devoted to highlighting major economic and policy developments in Serbia and the region through keynote addresses by Serbian Governor of the Central Bank, and the Minister of Finance, followed by two Special Guest Speakers. Again, due to the COVID-19 pandemic, panel discussion will start with the analysis of public health sector and the impact of COVID-19 on sustainable health financing in Serbia. Day One will be saturated additionally with topical panels on: policy response to growing inequality, “battle” for talents, industry 4.0 and digital transformation challenges, geopolitical issues for the Western Balkan region, discussion of regional cooperation as a precondition for sustainable growth, an overview of the new inclusive growth initiative from the angle of domestic and foreign investors. Day One will conclude with crucial remarks on select chosen industry sectors and a panel on the quality of public dialogue. Day Two, Tuesday March 8, will start with a Keynote Speaker address and continue with panels on energy transition, WB connectivity agenda, green transition, agriculture sustainability issues, digitalization of public services, prioritizing environmental protection, embracing artificial intelligence, and adopting circular and law carbon economy rules. As in the previous years, two panels will be dedicated to banking sector consolidation issues and adjustment to new post-COVID-19 normality. Finally, Day Two discussions will highlight education as a critical factor for sustainable development. A separate panel will cover topical issues of corporate social responsibility (CSR), emphatic leadership, and philanthropy. Day Three, Wednesday March 9, will start with a plenary session with addresses from two speakers (on labor and public administration issues). Subsequent panels will address two important questions on youth expectations, and the renaissance of the health systems based on ensuing digitalization. The KBF will conclude with a plenary address by Prime Minister Ana Brnabić.

The KBF will host three special guest speakers. Academician Vladimir Kostić, Professor and President of the Serbian Academy of Sciences and Arts will point out some critical factors in Serbia's future development. Mr. Carlos Alvarez Pereira, Member of the Club of Rome will talk about the World after COVID-19: In search of a new normal. Professor Branko Milanović, researcher and world-known accomplished author, will present an overview of global economic inequality.

This year’s event takes place in an exceptionally complex pandemic times with unusually high global trade and political tensions, open economic and union issues in Europe, performance and cooperation challenges faced by the Western Balkan region, and serious barriers to completing reforms and securing vibrant sustainable growth in Serbia. In this introduction to the KBF we briefly cover the global, European and regional issues before turning to domestic growth and reform issues.

Global Economic Environment:

The global economic recovery continues albeit at slower pace than expected due to renewed pandemic risks which now affect critical international supply chains. Together with growing commodity and energy prices this feeds global cost inflation pressures. At the same time, the unprecedented fiscal stimulus and monetary easing of 2020-2021 are increasingly contributing to stronger consumer demand thereby triggering a dangerous cost-push/demand-pull inflationary spiral. In those circumstances macro-policy trade-offs are becoming increasingly complex as many countries face the need to sustain fiscal and monetary support to economic activity, as well as pursue clear stabilization objectives and manage public debt levels.

Compared to earlier forecasts, the global growth projection has been revised down marginally to 5.9 percent for 2021 and left unchanged at 4.9 percent for 2022. Behind that average we observe considerably slower growth prospects for low-income developing countries, and somewhat lower growth in advanced economies susceptible to current supply shocks. By contrast, commodity and energy exporters are likely to benefit from stronger prices internationally. Countries dependent on contact-intensive sectors are likely to observe labor market recovery which significantly lags behind output growth and, thus, cause growing social and political tensions.

Medium term recovery will continue to diverge across countries. Advanced economies are expected to regain their pre-pandemic aggregate demand trend in 2022 and, based on IMF projections, exceed it by 0.9 percent in 2024. Emerging markets (excluding China) and developing economies are expected to remain below the pre-pandemic forecast in 2024, due to both economic/fiscal (earlier withdrawal of policy support) and health reasons (mainly lack of vaccines).

Supply disruptions pose another sensitive policy challenge. Shortages of key inputs have dragged down economic (esp. manufacturing) activity and, in tandem with increased commodity and energy prices, led to rapid increase in consumer price inflation in the United States, Germany, and many emerging market and developing economies. In lower income countries food prices have increased the most, contributing to potential social tensions. With hindsight, it is clear that fiscal stimulus to households and individuals was bound to contribute to higher consumer prices unless increased aggregate demand had been attracted to real estate and capital markets.

IFIs have now attached the highest priority to vaccination as an essential global policy to prevent more virulent virus mutations and continued spread of the pandemic. Vaccine donation pledges by G7 and G20 countries, removal of trade restrictions in the flow of vaccines and inputs for their production, and the necessary funding are key success factors in stopping the prolonged pandemic.

To make things even more difficult, undivided efforts are needed to stop the rise in global warming and contain the adverse health and economic effects of climate change must continue based on concrete commitments at the next UN Climate Change Conference. These include carbon prices adjusted to country circumstances, a green public investment and research push, and adequate funding pledges from advanced countries to mobilize $100 billion annually for climate related financing in developing countries.

To manage the resulting economic divergences among World economies, the IMF is calling on advanced economies and countries with strong external positions to voluntarily channel their SDRs from the recent $650 billion allocation into a new trust that would support investment in sustainable growth in developing countries.

The critical test of the proposed policy mix will be the ability of every country to aim for maximum sustainable growth coming out of the pandemic, while protecting the credibility of policy frameworks. With increasingly limited fiscal space in most economies, and the need to sustain priority health sector spending, there will be a growing pressure to better target fiscal stimulus and carefully design labor retraining and reallocation efforts. Like before, as soon as health risks subside, policy emphasis can shift to long-term structural issues addressed within credible medium-term expenditure frameworks. This could help improve fiscal performance (cut waste) and lower external financing costs.

Monetary policy will have a delicate task of tackling new inflationary pressures and financial risks, while supporting the economic recovery. The IMF forecasts that recent increases in headline inflation among advanced economies and emerging markets will return to stable pre-pandemic levels by mid-2022, with possible exceptions (such as the US and UK). But it warns that central banks should be prepared to act quickly and decisively should inflationary expectations become material. The IMF’s role in preventing the re-emergence of global inflationary pressures is critical.

As Gita Gopinath, IMF’s Chief Economist put it in October 2021 World Economic Outlook, the nature of COVID-19 health crisis combined with sensitive fiscal and monetary policy challenges in a globally connected economy makes it “clear that we are all in this together and the pandemic is not over anywhere until it is over everywhere. If COVID-19 were to have a prolonged impact into the medium term, it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to current projections.”

European Economic Environment

Based on most recent IMF and IFI reports, an increasingly resilient economic recovery is taking hold in Europe based on increasing vaccination rates and accommodative macroeconomic policies aimed at preserving employment and protecting private sector balance sheets. Risks remain elevated due to new pandemic waves riding on virus mutations and very uneven vaccination rates across countries. Increased vaccinations in emerging European economies appear critical measure to stop the pandemic.

At the end of 2021, GDP growth is expected to reach 5.2 percent in advanced and 6 percent in emerging European economies, which is marginally higher by 0.3 and 1.1 percentage points respectively compared to mid-year projections. The economic recovery is expected to consolidate in 2022 at 4.4 percent annual growth rate in advanced and 3.6 percent in emerging European economies, subject to downside risks associated with new virus mutations, prolonged supply disruptions, and higher commodity and energy prices. The unprecedented fiscal support from 2020–21 should be scaled down and gradually reoriented towards addressing longer term structural and growth issues, while continuing to shore up the recovery through better targeted policies and transfers.

The pace of withdrawing and restructuring fiscal support must be calibrated to country-specific needs with utmost attention devoted to sustaining the momentum of economic recovery. Accommodative monetary policy should continue to follow fiscal support while carefully monitoring early signs of growing inflationary pressures such as those recently observed in Germany and some emerging European economies.

In the medium turn, the pandemic crisis is expected to have uneven country impact leading to a sizable reallocation of labor and possibly industrial capacity. Adequate public policies could support the ensuing structural transformations through smart investment incentives and hiring subsidies, as well as better targeted labor market and education policies to enhance workforce skills and align them with industry needs. The key challenges facing policymakers include boosting productivity growth, tackling the problems posed by aging populations, and filling gaps in green and digital infrastructure.

Western Balkans Regional Economic Environment:

In 2021, all the Western Balkan (WB) countries saw an accelerated rebound from the COVID-19-induced recession based on both domestic and external demand. But the recovery, supported by a combination of domestic reopening and favorable external conditions for the WB region exports, remains fragile.

As a result of falling Covid-19 infection rates, domestic and cross-border mobility restrictions were eased during late spring and summer. This triggered a sharp rebound in domestic consumption and promoted travel across Europe, boosting remittances and tourism revenues during the peak summer season. Additional boost to demand and exports came from rapid vaccination and strong fiscal stimulus in key EU countries.

Similar to global trends, the recovery in the WB regional labor markets lags behind GDP revival. While the labor force participation rates edged up during the first half of 2021, the unemployment rate also increased as employment support programs proved insufficient to boost post-crisis jobs recovery. This particularly affected women and youth, with long-term labor force scarring effects.

While the pace of vaccinations has picked up recently, the WB countries still significantly lag behind more advanced European countries in vaccination rates. This makes them less prepared to withstand the threat of ongoing Delta wave and possible new variants of the virus. Furthermore, higher vaccine hesitancy across the Western Balkans calls for new approaches to reach the levels of vaccination needed to effectively suppress the COVID-19 pandemic.

Regional fiscal balances have started to improve with stronger economic performance, but additional effort will be needed to fully replenish fiscal buffers. GDP growth recovery, higher imports, and stronger consumer demand all contributed to buoyant revenue collection across the region, particularly from value-added tax. On the expenditure side, current public spending leveled off after the countercyclical surge in 2020 thereby helping control fiscal deficits. All WB countries (except Bosnia and Herzegovina) are expected to have narrower fiscal deficits in 2021, with average deficit reduced by 2.7 percent of GDP year-on-year. Despite these improvements, most WB countries will continue to have fiscal deficits at above pre-pandemic levels and public debt at historic highs (except for Serbia and Bosnia and Herzegovina). As the recovery from COVID-19 takes hold, these issues will become top public financial management (PFM) priority addressed within an appropriate debt sustainability and medium-term expenditure framework (MTEF).

In line with global tendencies, the WB countries are experiencing growing inflationary pressures. Compared to 0.9 percent in 2020, average inflation is projected to reach 2.3 percent in 2021 and stabilize at 2.1 percent per annum in 2022-23. External inflationary pressures caused by the crisis-related supply disruptions and growing commodity and energy prices driven by strong demand from advanced economies, may introduce a strong upside risk on inflation. Additional pressures may come from the faster-than-expected recovery in domestic consumer demand and structural mismatch in the labor markets during summer tourism season.

Financial sector conditions in the WB region are supportive of growth, but many risks remain as central banks rebase their expansionary monetary policies, phase out (or scale down) asset purchase options and prepare contingent plans to counter possible new inflationary pressures (and expectations). Fiscal and monetary policy measures that helped mitigate the impact of the 2020 crisis on the quality of bank assets, and keep non-performing loan ratios broadly stable, may have to be redirected towards sustaining monetary and fiscal stability. The health of the banking system will be tested during the recovery, particularly as remaining borrower relief measures are phased out.

Overall, the growth outlook for the WB countries has improved due to a stronger-than-expected economic performance in 2021. After a 3.1 percent contraction in 2020, GDP growth is projected to reach 5.9 percent in 2021, 4.1 percent in 2022 and 3.8 percent in 2023. Pre-crisis levels of output are expected to be surpassed by the end of 2021 (or mid-2022 for Montenegro). With projected growth recovery in 2021, the poverty rate for the WB region is projected to resume its historical downward trend.

The overall positive outlook for the WB region is still marred by risks related to a possible return of the pandemic related restrictions, depleted fiscal space, and growing public debt levels. In addition, political uncertainty could also delay economic recovery and affect both domestic and foreign investment, which the region needs to boost potential output and employment.

Looking beyond the pandemic, the policy focus needs to shift back to the key structural impediments to job creation and economic transformation. These include weak firm-level productivity, lack of market competition, limited regional economic integration, and weak institutions. The crisis has only made them more apparent and severe. And the need to resolve them will increase as the fiscal space narrows and structural reforms become indispensable in boosting private investment and facilitating preparation toward EU membership.

Furthermore, the WB countries also face a key decision point regarding the imminent green transition. Global strides toward action on climate change, pollution and existential environmental crises are changing the foundations of economic activity, consumer choices, and investor behavior everywhere. The WB region must embrace these changes and tilt away from familiar brown industries. Leapfrogging to a green growth pathway is far from easy, especially in the short term. Despite myriad challenges, the green transition also offers opportunities for the Western Balkans, not least through closer integration into Euro-centric global value chains, as well as access to significant EU resources to help fund a green transition. Effectively managing this transition, including the many policy tradeoffs, will need to be a core focus of policy attention for the Western Balkans in the years ahead.

Serbia: In Search of a Sustainable Development Agenda

Recent Economic Developments: Growth recovery in 2021 now projected at 7+ percent is stronger than previously expected (6 percent), supported primarily by a strong rebound in private consumption. Despite the economic recovery, there was an increase in unemployment rate averaging 11.9 percent in the first half of 2021. The fiscal deficit is gradually narrowing in 2021, despite the cost of continued fiscal stimulus program. November inflation has increased to 7.5 percent, now above the NBS target band. The current account deficit for the year is expected to be lower than projected earlier mainly due to a strong export performance. A return to the medium term 4 percent growth path is expected from 2022.

On the expenditure side, consumption and investment were the main sources of growth: private consumption increased 17.6 percent in real terms. Net exports had a negative contribution to growth despite very good export performance (up 36.5 percent) due to a huge 42.9 percent increase in imports. Total investment increased by 44.4 percent in real terms and contributed 9.3 percentage points to GDP growth.

The economic recovery in 2021 was broad based on the supply side, with the exception of agriculture where output declined by 1.8 percent in real terms caused by adverse weather conditions.

Countercyclical measures which helped mitigate the impact of the pandemic on the labor market in 2020 have been partially continued in 2021 which led to an increase in unemployment rate from 9.0 to 11.9. It should be noted, though, that cyclical movements of unemployment rates were initially caused by the fiscal stimulus program which made access to government support conditional on retaining previous employment levels. For some foreign-owned large manufacturers the fiscal stimulus was not sufficient to retain their operations in Serbia, resulting in significant layoffs.

Average nominal wages increased by 8.6 percent during H1 of 2021, with faster nominal growth in the private (9.4 percent) than in the public sector (7.5 percent).

General government fiscal deficit decreased significantly based on recovered nominal revenues (up 25.7 percent during the first seven months of 2021 compared to the same period in 2020) and a slight (0.6 percent) decrease of nominal expenditures. The consolidated fiscal deficit was reduced to just 0.1 percent of GDP by end-July (composed of central government deficit at 0.7 percent of GDP and a surplus in local government budgets and (pension and health insurance) funds. At the end of October public debt stood at 56.5 percent of GDP.

In September 2021, Serbia issued its first green bond (along with a new euro bond). The green bond of EUR1 billion had a seven years maturity and 1.26 percent yield, while the euro bond of EUR750 million had a fifteen year maturity and 2.3 percent yield. Like in previous years, the CAD was fully covered by foreign direct investment (FDI) which stood at 3.9 percent of GDP. Fitch affirmed Serbia’s sovereign issuer default rating at BB+, with a stable outlook.

Inflation increased gradually driven by stronger consumer demand, global supply disruptions, and higher commodity, energy, and food prices. Consumer price index (CPI) moved from low and stable 1.4 percent annual inflation in 2020 and the first quarter of 2021, to 4.3 percent annual inflation in August 2021, and 7.5 percent in November 2021, with possible continued buildup of inflationary pressures in the rest of the year 2021.

The National Bank of Serbia (NBS) remains committed to inflation targeting (3 percent +/–1.5 percent), and the policy rate has been left unchanged at 1 percent since December 2020. Compared to previous year, money supply increased by 13.5 percent in July 2021, while the nominal exchange rate has remained steady following a small appreciation in 2019. At the end of November 2021, official foreign currency reserves stood at EUR 16.4 billion, up EUR 3.0 billion since the beginning of the year, equivalent to more than six months of imports.

Banking sector performance continued to be robust and profitable albeit with lower returns on both assets (ROA) and equity (ROE). Liquidity indicators also improved during the first half of the year, while the share of nonperforming loans (NPLs) declined to 3.5 percent in July 2021.

Development Challenges, Outlook and Risks: As already mentioned, GDP growth is expected to reach 7+ percent in 2021, and return to stable 4 percent medium term path. Higher growth rate this year can be attributed to substantial fiscal stimulus package and economic revival in the WB region and among its main trading partners in the EU. The new fiscal stimulus program will be smaller and different in structure, probably generating different impact on the economy and labor market performance. The main drivers of growth are expected to be consumption and investment, while net exports will continue to make a negative contribution to growth. It is expected that services sector will become the main driver of economic growth going forward.

Reaching sustainable and inclusive growth is of paramount importance. Medium-term policy focus should be not only on accelerating growth through further structural reforms, but also on “greening growth and investment”, investing in education and public health. To unleash its growth potential in full, Serbia must address structural bottlenecks related to governance, labor markets, infrastructure, and the tax system. Green—clean and resilient growth should be supported by promoting efficiency gains in the use of raw materials and energy, expanding green industries and technologies, emphasizing less polluting and energy-efficient industries, and proactively building up resilience to climate and disaster risks. Such growth strategy would accelerate sustainable GDP growth, create new, high-quality, high-paying jobs and promote inclusive growth.

Macroeconomic stability will be maintained over the medium term by adhering to a consistent public expenditure framework increasingly oriented to the achievement of results and outcomes within a performance based budgeting system. This year the fiscal deficit could be significantly lower than the one projected earlier under the base-case scenario. Consequently, public debt could start falling as a share of GDP earlier than anticipated. Inflation pressures are mounting in Serbia as in other countries. Keeping inflation within the NBS target while financially supporting economic revival will pose a challenge in the coming period. Likewise, present expectations regarding stable current account deficit levels and ample FDI inflows may also come under pressure with rising international commodity and energy prices, and possible limitations on the export side. This may push up external debt levels and require carefully crafted fiscal and monetary policy response as indicated in the section on global economy above.

In short, relatively positive growth and macroeconomic outlook could be affected by numerous risks. The main risks relate to external developments—that is recovery of the European and global economies—since those will impact most the evolution of exports and FDI, which are both critical for the growth of the Serbian economy. They could be amplified by the ongoing disruptions in global value chains. There are, however, also internal risks to the baseline scenario. In addition to the obvious buildup of inflationary pressures, new wave of the COVID-19 pandemic could have an adverse impact on the economy as well, although new lockdowns are not foreseen. Contingent liabilities could affect public finances, particularly those related to the deterioration in the performance of state-owned enterprises that have long been financially troubled. Political developments could distract the government from undertaking necessary reforms, the most important from a growth perspective being those related to improving the business environment, education, and environmental management.

In conclusion, we would like to stress that the true spirit and tradition of the KBF is to promote bold ideas that scan help us better understand the challenges and opportunities connected with sustainable development agenda. The aim of the KBF 2022 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 is entirely yours!

We stand ready to welcome you at the KBF 2022! Do come.

Programme Committee of the Kopaonik Business Forum