Coming to a mall near you in Serbia

By bne IntelliNews September 11, 2013

Harriet Salem in Belgrade -

On August 29, a crowd of over 2,500 people gathered at Belgrade's Delta Shopping Mall to witness the opening of Serbia's first H&M - a Swedish company known for selling high fashion at affordable prices. Although the store's doors did not open until 11am, eager shoppers began queuing outside as early as 5am. The first customers through the doors were treated to a gift voucher, worth around €13, as well as front-of-house seats for a procession of speeches, red ribbon cutting and synchronised dancing to garish pop tunes.

While the hysteria surrounding the opening of a store, considered unremarkable across most of Western Europe, may at first seem an over-reaction, the mass excitement becomes understandable in the context of the lack of other options on the Serbian high street. "Prices here are high compared to the average income of the population, there is a lack of affordable basic goods," explains Andrew Roberts, managing director of Eastern Europe Economics, a regional financial consultancy. "This is because competition is low and margins are high".

Similar scenes can also be expected if home furnishings store IKEA opens a long-anticipated branch in Belgrade next spring. Negotiations to develop five IKEA stores across Serbia - a €250m investment by the Swedish firm - began in 2008, but have stalled repeatedly due an inability to reach agreement with authorities over land prices and locations. Now, five years on, the company's director Mikael Ohlsson says that if necessary administrative procedures can be completed by the end of summer, IKEA hopes to finally open its doors to Serbian shoppers in April 2014.

That's a big "if", though. "A number of large chains, have for a few years now, been talking about coming here, but they always come up against problems getting the required land permits," Roberts tells bne. "In Serbia, complex bureaucratic processes and inefficient courts, that can take years to process cases, are acting as a deterrent in an environment where otherwise low tax rates should attract foreign investors."

H&M, which invested directly in Serbia rather than through franchise partners, encountered similar bureaucratic stumbling blocks to IKEA. "H&M did not come to Serbia earlier, because we were unable to find appropriate space," the company's director, Karl-Johan Persson, told Serbian online business portal Ekapija in August.

These difficulties are part of a wider problem in Serbia that has hampered the country's efforts to attract serious foreign direct investment (FDI) over the past decade. This in turn has contributed to the stagnation of Serbia's economy, which has seen the public debt and budget deficit climb to worrying levels, while the unemployment rate stands at about 25%.

Last year, according to statistics from the Serbia Investment and Export Promotion Agency (SIEPA), the country attracted just under €2bn in FDI, less that half that of the peak in 2009.

Statistics from the World Bank and International Finance Corporation on the business environment in Serbia also paint a grim picture; Serbia is one of the region's poorest performers, ranking 19th out of 24 on the "Doing Business" index. Scores on "enforcing contracts" and "dealing with construction permits" are particularly dismal with the country rated at 20th and 21st, respectively.

However, Serbia's coalition government, which recently appointed a new cabinet with many fresh faces, says it is prepared to take tough action to revive the country's beleaguered economy - and increasing the country's appeal to foreign investors looks to be high up the agenda. "We're very keen to get more know-how from western society and attract more investors - that's the main aim of this government," Aleksandar Vucic, the deputy prime minister and leader of the coalition's largest party, told the BBC.

According to a SIEPA advisor, moves are already underway to create a more hospitable environment for potential investors. "We are looking at major changes in labour law in the near future, along with the one concerning planning and construction law - this was suggested to our government by foreign investors and so we are attempting to fix the problems that were pointed at," he tells bne.

Certainly, the appointment of Krstic Lazar, a Harvard-educated technocrat, to the position of finance minister, alongside a renewed commitment to renegotiate the terms of a frozen International Monetary Fund loan, and the country's rapid progression towards the EU (official accession talks are expected to start in January 2014) have convinced some that the government mean business.

"Time to give it a second look" is the title of the Royal Bank of Scotland's recent report on Serbia's economy. Cautiously optimistic, the report highlights the lack of market recognition for the recent positive progress made by the Serbian authorities - most notably the sale of 49% of JAT Airways to Eithad and rumoured upcoming privatisation sale of Telekom Serbia - concluding: "it is time for the potential upside to be acknowledged". Although far from a seal of approval, the report is a U-turn on the bank's position in May, and an indication it feels the government is at least starting to make moves in the right direction.

But while the tough talk is impressing some, others worry that making good on the proposed economic and legal reforms will be even more challenging than assembling IKEA furniture. "Everybody knows what needs to happen and everyone has known for a long time." Roberts tells bne. "There has been no shortage of plans in Serbia, the previous government had them to. The problem is they are never implemented."

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