Serbia’s current account deficit shrank 55.2% y/y to EUR 289mn in January-February on the back of a narrowing foreign trade gap and stronger remittances inflow, central bank data showed.  Exports jumped 25.4% y/y to EUR 1.9bn supported by the production launch at the Serbian car plant of Fiat. We note that the strong exports increase partly reflects low prior-year base effects as Serbia’s industrial sector was heavily undermined by temporary shut-downs at many production capacities in early 2012 given extremely cold weather.

January-February imports recorded a mild increase of 5.1% y/y to EUR 2.6bn. The foreign trade deficit, thus, narrowed 27.5% y/y to EUR 679mn.  In addition, the current transfer surplus increased 16% y/y to 427mn over the period, bolstered by surging private remittances inflow (up 21.5% y/y to EUR 296mn).

The financial account surplus shrank 47% y/y to EUR 282mn in January-February due to a EUR 292mn negative balance in the other investment account. The latter achieved a EUR 176mn positive balance a year earlier. This was only partly offset by strong increase in portfolio and foreign direct investments.

The recent European Commission decision recommending the launch of accession negotiation with Serbia will likely have a positive impact on investor’s confidence and result in further portfolio and foreign direct investments revival.

The country expects to attract up to EUR 2bn worth of FDI in 2013 mainly in the energy, infrastructure and agriculture sectors. This will help finance the current account gap and improve Serbia’s external position.

Serbia's current account gap widened 9.9% y/y to 11.0% of GDP (EUR 3.2bn) in 2012 due to an expanding foreign trade deficit and falling private remittances.  The net FDI inflow shrank to only 0.8% of GDP (EUR 232mn) reaching their lowest value since 2002.