Serbia: Balance of payments pressures moderate
Overview:
Serbia is one of the many countries in Eastern Europe that has recorded rapid growth at the cost of running a very large current account deficit financed by debt-creating inflows as much as by net FDI. The reduction in capital inflows into emerging markets in Q42008, then, struck Serbia as hard as any other country in the region and pushed the dinar sharply weaker. However, Serbia has a large foreign exchange reserve buffer and a healthy banking system. Hence, after a temporary loss of confidence in the banking system in the autumn, capital outflows have moderated. The current account deficit is being forced down by a severe import contraction. While this is negative for growth, these balance of payments trends have allowed the downward pressure on FX reserves and the dinar to abate in recent months.