Nicholas Watson in Belgrade -

Having helped steer the development of Serbia's banking sector over the last five years, the European Bank for Reconstruction and Development (EBRD) said Tuesday that its strategic priorities for the next two years would be focused on the Balkan country's corporate sector as well as its infrastructure. There's still much work to do in Serbia, the EBRD notes – and much that could yet go wrong.

In its "Strategy for Serbia" report, the EBRD is clearly pleased with the progress of the banking sector in Serbia and its role in helping it reach the current stage of development.

In 2000, following the overthrow of the late dictator Slobodan Milosevic, the government, prodded by institutions like the EBRD, threw open the doors to the banking sector, allowing foreign banks to open up affiliates in the country as well as enter the market through acquisitions, privatisations or green-field licences.

The EBRD believes it made "a significant transition impact" in the banking sector by, for example, taking an equity stake in the local bank Eksimbanka, which resulted in a successful sale to a foreign strategic investor, as well as providing the first subordinated loan in the country to Raiffeisen Bank, which is now the country's largest lender.

Following a wave of privatisations, Serbia's banking sector is now mostly in private hands, with some 80% of the sector owned by foreign investors and a total of 18 foreign banks present in the market. Consolidation is the next phase, leaving the EBRD free to focus on other less-developed parts of the financial system such as insurance, private pension funds and mutual funds.

Bankers in Belgrade see the liberalisation of the insurance sector as crucial to development of the pensions industry, which would in turn revitalise the pretty moribund stock market. WTO members called on Serbia in January to do more to liberalise the insurance sector, which has yet to see any major privatisations though some 10 foreign companies have set up there.

While the financial sector has dominated the EBRD's focus over past two years, the country's corporate sector will dominate the next two.

Business as usual

In the years following the ousting of Milosevic, Serbia saw a huge bout of privatisation, which by all accounts was skilfully drawn up and managed by the government. The biggest single privatisation since reforms began occurred in August 2006 in the telecommunications sector, with the sale of the mobile company, Mobi63, to Telenor of Norway for in excess of €1.5bn.

However, observers have noted that the privatisation process has lost its momentum somewhat over the past two years.

"There has been a positive trend in terms of what the government has achieved in terms of privatisation and we would like to see that trend strengthen and continue as soon as possible," says Vesna Mukaetova, the acting head of the EBRD's Serbian office. "But when you privatise state-owned companies it is often not easy so we understand the difficulties the government is going through and we can only support the continuation of this process."

A loan for agribusiness

Given this, the EBRD intends to help accelerate the privatisation and restructuring programme for medium and large companies in order to attract much-needed investment and boost the competitiveness of these industries. Through this, the EBRD predicts foreign direct investment (FDI) will reach more than €3bn in 2006.

"We are very much interested in supporting foreign direct investment in the country whether through green-field projects or through privatisation of exiting companies or privatisation restructuring," Mukaetova says.

One particular area of business the EBRD is interested in supporting are the Serbian companies that have grown rapidly over the past five years, emerging as regional leaders after consolidation in their respective fields, and are now looking to expand regionally.

"In the past we have seen companies from Croatia and Slovenia expanding into Bosnia, Serbia and Macedonia, and we now see possibilities for companies from Serbia to expand into Bosnia, Croatia and Macedonia," says Mukaetova. "We would be looking to support these companies."

Many of these companies are involved in agribusiness, such as food-processing, though the EBRD stresses it will also look at businesses in primary agriculture as well as in other areas such retail, property and energy efficiency projects.

One common complaint from bankers in Serbia is the seeming lack of small and medium-sized businesses (SMEs) in Serbia compared with the other states of the former Yugoslavia. This is partly put down to history, in that Serbia was the centre for the large state-owned conglomerates during communism, while the SMEs were concentrated in the other parts of the country such as Croatia and Slovenia. During the 1990s the development of SMEs was stunted by the wars and the ensuing chaos and rampant corruption that characterised the Milosevic years.

"Under Milosevic the country actually went backwards," sighs Oliver Roegl, the chairman of Raiffeisen Bank in Belgrade. "One of the pictures of this country is how much potential was lost during the 1990s."

However, Roegl says the SME segment is slowly but surely changing, something the EBRD is keen to help along with SME credit lines to local banks, as well as micro lending to start-up businesses through institutions like ProCredit Bank, in which the EBRD owns a 16.7% stake. There is also the new EBRD-Italy Western Balkans Local Enterprise Facility, which enables the bank to support smaller, fast-growing companies through debt, quasi-debt and equity finance, which is still relatively scarce in Serbia.

"From working in other countries we see the SME sector in Serbia developing rapidly. Even though the sector may not have existed in the former Yugoslav system because of big conglomerates, it's been quite a few years these that micro-businesses and SMEs have been established and are developing. And we are very much looking forward to supporting them," says Mukaetova.

From Roegl's perspective, what is especially needed for SMEs and micro-business to flourish is a better legal and physical environment in which to operate.

The EBRD says legal reform in Serbia remains a top priority, as well as developing the transport, energy and municipal infrastructure in the country. "The majority of future Bank investments (in terms of volume) are expected in the Transport sector in order to complete the development of a modern highway and railway network on Corridor X," the EBRD report says.

Politics, politics

To most observers, it is the politics that remains the thorniest problem in Serbia, which in turn discourages the sort of long-term investment in green-field projects that the country needs but is seeing disappearing south to Bulgaria and Romania. This is a shame, says the EBRD, because it is ready to co-invest with foreign corporations willing to expand into the Serbian market. It reckons Serbia will be in a good position to attract such investors due to its proximity to the EU market as well as its skilled labour force.

"Employee costs are relatively low, the corporate income tax rate is one of the lowest in Europe, and corporate tax holidays and other incentive schemes introduced by the government may also play a role," the report says.

The first step is for a new government to be formed in Belgrade following January’s elections. Almost three months since those elections there is still no new government because no party wishes to be in power when a formal decision is made to send Kosovo along the road to independence – a development vehemently opposed by virtually all Serbs. According to the constitution, if a new government is not elected by May 14 new elections must be called.

"We, as everybody else, are expecting a new government to be established as soon as possible and looking forward to work with a government that is reform-oriented," says Mukaetova.

However, another banker in Belgrade is less optimistic. "People are getting sick of elections – new polls could be catastrophic for the country," says the banker.

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