COMMENT: Legacy issues still plague ex-Yugoslavia

By bne IntelliNews July 29, 2015

Gary Kleiman of Kleiman International -


The 20th anniversary of the signing of the Dayton Accords that ended the civil war between the states of the former Yugoslavia in December will be a sombre occasion – not least because the Western Balkans has still not shaken off much of its investor pariah status.

Even though this Eastern Bloc country had already embarked on market-oriented policies before Communism collapsed from 1989 onwards, this process was halted by the civil wars and has since given way to a decades-long record of slow growth and banking and debt crises. Only in 2013 did Slovenia finally agree €385mn in compensation for old federation savings accounts blocked since the early 1990s, underscoring the area’s weak financial legacy. And continuing political fragmentation in Bosnia & Herzegovina, Serbia-Kosovo, and between the government and opposition in Macedonia is an ingrained investment obstacle; relative peace alone has not inspired investor portfolio allocation.

Serbia’s MSCI frontier index fall was 20% through end-July this year, despite a new €1.2bn International Monetary Fund (IMF) stand-by arrangement that’s broadly on track. Temporary limits were imposed on Greek-owned banks with a 15% share of the market, and the recession remains stubborn with no growth expected this year. With headline inflation aided by lower energy prices at just 1.5%, the central bank in June cut the benchmark rate to 6%, but austerity measures continue to depress demand. Public sector pension and salary retrenchment, and state company restructuring and sales are designed to keep the fiscal deficit to 5% of GDP and ensure sustainability. However the IMF’s latest review cites delays in introducing electricity taxes and privatizing rail and power firms. Bank non-performing loans (NPL) in Serbia are over 20% with a big portion over a year overdue, and a comprehensive strategy to deal with them, including stricter classification rules and court insolvency procedures, has not yet been agreed. Although the EU’s resolution directive has been adopted as a model for a domestic law to deal with problem banks, no institution has been liquidated and only one small state unit, Casanska, has been bought by a private investor.

Unemployment in Serbia is at 20%, but it’s double that level in Kosovo, whose independence in 2008 from Serbia is still not recognized by Belgrade and its allies. It relies on a UN security presence for jobs and protection, and remittances from abroad to drive the roughly 3% annual GDP growth. Another IMF stand-by accord was just reached to cap the budget gap at 2% of GDP, and enable the central bank to act as a lender of last resort. Other bilateral and multilateral donors will support a better rule of law and business environment, including bankruptcy and collateral practices. Such moves are intended to curb the pervasive informal economy and illegal migration.

Croatia’s MSCI component lost 5% through July this year despite a return to positive GDP growth in the latest quarter for the first time since 2008. A level of 90% of GDP/public debt and the sudden Swiss franc appreciation against the domestic currency remain drags on the economy. Both the main political parties heading into the 2016 parliamentary elections refuse to consider resorting to the IMF as they push modest reforms to reverse stagnation and chronic overspending. The country is under the EU’s excessive deficit procedure, and the Croatia kuna peg to the euro envisions eventual entry to the single currency. Exports, to Italy especially, were up 10% and retail sales revived in the first quarter. However corporate investment is in a long-term slump, with government interference and ownership criticized in the IMF’s May Article IV report. Debt restructuring has been stymied by poor creditor rights and reluctance to sell rather than reorganize state enterprises under lax governance regimes. Fiscal consolidation lacks “credibility and strength”, while a recent income tax reduction and international reserves are “modest,” the IMF believes. The banking sector, with a 15% NPL ratio, almost entirely in private hands is an exception in the region, but officials wreaked further damage by ordering Swiss franc conversion at a 15% discount to the market rate for business and household borrowers in response to street protests.

Bosnia & Herzegovina’s currency board avoids such upsets, but the multi-ethnic rotating presidency has stifled economic and financial changes demanded as conditions for EU and IMF assistance. The Bosnian Serbs rejected Brussels roadmap toward an Association Agreement, and the last IMF accord expired a year ago. Per-capita income is a quarter of developed Europe’s, and budget and current account deficits have widened with international assistance in limbo. Reconstruction projects are blocked and the national airline is bankrupt, while private credit is “stuck in low gear”, with missing anti-money laundering and terror funding safeguards, according to the IMF.

Slovenia figured as a prime bailout candidate last year until it rescued the ailing banks on its own money and set up a central bad-asset disposal agency, which the European Central Bank recently faulted for insufficient oversight. Stocks are off 5% on the MSCI Index as of end-July on lacklustre 1.5% growth expected for 2015 and lingering public and private balance sheet strains. State company divestitures are behind schedule, but the Eurozone crisis has finally prompted action. Privatization and foreign majority control have been taboos in banking and industrial sectors since independence, and cross-border deals were previously rejected with ex-Yugoslavia neighbours.  

All members of ex-Yugoslavia are foundering under heavy debt and financial system burdens despite regular cleanup advice and cash from the international community. 20 years after the fighting, foreign investors are still waiting for commercial and credit direction to enter a post-conflict phase.

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