Capital Markets and Portfolio Investment

Serbia welcomes both domestic and foreign portfolio investments and regulates them efficiently. The Government removed restrictions on short-term portfolio investments April 2018. Residents of Serbia are now allowed to purchase foreign short-term securities, and foreigners are allowed to purchase short-term securities in Serbia. Payments related to long-term securities have no restriction.

In 2018, Serbia recorded net outflows of USD one billion in portfolio investment, according to the National Bank of Serbia (NBS). The Serbian government regularly issues bonds to finance its budget deficit, including short-term, dinar-denominated T-bills, and dinar-denominated, euro-indexed government bonds. The total value of government debt securities issued on the domestic market reached USD 9.9 billion in January 2019, with 67.3 percent in Serbian dinars, 32.1 percent in euros, and 0.6 percent in U.S. dollars.

Total Serbian government-issued debt instruments on the domestic and international markets stood at USD 13.3 billion in January 2019 (see http://www.javnidug.gov.rs/upload/Bilteni/2019 percent20Mesecni/Mesecni percent20izvestaj percent20Uprave percent20za percent20javni percent20dug percent20- percent20CIR percent20Januar percent202019.pdf ).

Serbia’s international credit ratings are improving. In March 2017, Moody’s upgraded the Government of Serbia’s long-term issuer ratings to Ba3, from B1. In December 2017, Standard & Poor’s raised its ratings for Serbia from BB- to BB with a positive outlook. Also in December 2017, Fitch raised Serbia’s credit rating from BB- to BB. The improved ratings remain below investment grade.

Serbia’s equity and bond markets are underdeveloped. Corporate securities and government bonds are traded on the Belgrade Stock Exchange (BSE). Of 990 companies listed on the exchange, shares of fewer than 100 companies are traded regularly (more than once a week). Total annual turnover on the BSE in 2018 was USD 584 million, which is almost unchanged compared to the volume of 2017. However, trading volumes have declined since 2007, when the total turnover reached USD 2.7 billion.

Established in 1995, the Securities Commission regulates the Serbian securities market. The Commission also supervises investment funds in accordance with the Investment Funds Law. As of March 2019, 21 registered investment funds operate in Serbia (see http://www.sec.gov.rs/index.php/en/public-registers-of-information/register-of-investment-funds  ).

Market terms determine credit allocation. In September 2018, the total volume of issued loans in the financial sector stood at USD 21 billion. Average interest rates are decreasing but still higher than the EU average. The business community cites tight credit policies and expensive commercial borrowing for all but the largest corporations as impediments to business expansion. Around 65 percent of all lending is denominated in euros, an additional 3 percent in Swiss francs, and 0.7 percent in U.S. dollars, all of which provide lower rates, but also shift exchange-rate risk to borrowers. Foreign investors are able to obtain credit on the domestic market. The government and central bank respect IMF Article VIII, and do not place restrictions on payments or transfers for current international transactions.

Money and Banking System

Serbian companies often do not access credit, and look to friends or family when they need investment and operational funds. Only a few corporate and municipal bonds have been issued so far, and the financial market is not well developed.

The NBS regulates the banking sector. Foreign banks are allowed to establish operations in Serbia, and foreigners can freely open both local currency and hard currency non-resident accounts. The banking sector comprises 91 percent of the total assets of the financial sector. As of September 2018, consolidation had reduced the sector to 28 banks with total assets of USD 35 billion (about 80 percent of GDP), with 76 percent of the market held by foreign-owned banks. The top ten banks, with country of ownership and estimated assets are Banca Intesa (Italy, USD 5.6 billion); UniCredit (Italy, USD 4.0 billion); Komercijalna Banka (Serbian government, USD 3.8 billion); Société Générale (France, USD 2.9 billion); Raiffeisen (Austria, USD 2.7 billion); AIK Banka Nis (Serbia, USD 1.9 billion); Erste Bank (Austria, USD 1.9 billion); Eurobank EFG (Greece, USD 1.6 billion); Postanska Stedionica (Serbian government, USD 1.6 billion); and Vojvodjanska Banka (Hungary, USD 1.2 billion). See http://www.nbs.rs/internet/latinica/55/55_4/kvartalni_izvestaj_III_18.pdf .

Four state-owned banks in Serbia went bankrupt after the global financial crisis in 2008. The state compensated the banks’ depositors with payouts of nearly USD 1 billion. A number of state-controlled banks have had financial difficulties since the crisis because of mismanagement and, in one instance, alleged corruption. The banks honored all withdrawal requests during the financial crisis and appear to have regained consumer trust, as evidenced by the gradual return of withdrawn deposits to the banking system. In December 2018, savings deposits in the banking sector reached USD 11.6 billion, exceeding pre-crisis levels.

In December 2017, the IMF assessed that Serbia’s banking sector remains robust, with large liquidity and capital buffers. Profitability of the sector is on the rise. Deposit growth has continued, and results of lending surveys point to more relaxed lending standards for SMEs amid greater competition, cheaper sources of funding, and higher risk tolerance. The IMF said it supports NBS efforts to enhance prudential policies in the context of implementing the Basel III framework on capital adequacy. In a recent review, the IMF pointed to the continued resilience of the banking sector, with an average capital adequacy ratio exceeding 22.8 percent in September 2018 and a gradual improvement in asset quality.

The IMF assessed in 2018 that authorities had made important progress, with the aggregate stock of non-performing loans (NPLs) falling both in nominal terms and relative to total loans. NPLs have declined to 5.7 percent as of December 2018, their lowest level since January 2009. Since the adoption of an NPL resolution strategy in mid-2015, NPLs have declined from 22.2 to 5.7 percent of the total loan portfolio. NPLs remain fully provisioned. In addition, there are significant foreign exchanges risks, as 74 percent of all outstanding loans are indexed to foreign currencies (primarily the euro). As of April 2019, the government was considering action to protect consumers who had taken mortgage loans denominated in Swiss francs. These measures would reportedly include mandatory conversion to euros, with banks and the state sharing losses from a reduction of outstanding principal and interest balances. However, no measures had yet been finalized.

The NBS, as chief regulator of the financial system, has announced that cryptocurrencies are not regulated by law in Serbia. NBS is not currently preparing such regulations, as the volume of cryptocurrency use is still very low. NBS said it therefore does not have the authority to issue licenses for trading in cryptocurrencies or for setting up cryptocurrency ATMs. Nor are cryptocurrency traders or internet platforms subject to NBS oversight. NBS stressed that those engaging in cryptocurrency transactions or activities are the sole carriers of risk.

Despite the lack of regulation, trading in cryptocurrencies in Serbia does occur. The company ECD Group has installed an online platform for trading in cryptocurrencies (Bitcoin BTC, Litecoin LTC, and Ethereum ETH) at https://ecd.rs/  . The company claims to have over 1,000 registered users of the platform. ECD Group has also installed three ATMs for cryptocurrencies in Serbia, two of which are only for buying bitcoins and litecoins, while one supports two-way transactions – i.e. both buying and selling. Trading in crypto-currencies dropped by 90 percent in 2018 in Serbia compared to 2017, EDC Serbia said. Previously, some users would buy up to four to five bitcoins per day, but in 2018 Serbians were mostly selling bitcoin. Bitcoin “mining” also dropped in Serbia, and many are selling their equipment used for this purpose, according to EDC’s CEO, who is also the founder of the BitCoin Association of Serbia. (http://www.bitcoinasocijacija.org  )

Hostile takeovers are extremely rare in Serbia. The Law on Takeover of Shareholding Companies regulates defense mechanisms. Frequently after privatization, the new strategic owners of formerly state-controlled companies have sought to buy out minority shareholders.

Foreign Exchange and Remittances

Foreign Exchange

Serbia’s Foreign Investment Law guarantees the right to transfer and repatriate profits from Serbia, and foreign exchange is available. Serbia permits the free flow of capital, including for investment, such as the acquisition of real estate and equipment. Non-residents may maintain both foreign currency and dinar denominated bank accounts without restrictions. Investors may use these accounts to make or receive payments in foreign currency. The government amended the Foreign Exchange Law in December 2014 to authorize Serbian citizens to conclude transactions abroad through internet payment systems such as PayPal.

The NBS targets inflation in its monetary policy, and regularly intervenes in the foreign exchange market to that end. In 2018, the NBS sold the equivalent of USD 280 million on the interbank currency market, and bought USD two billion, to prevent sharp fluctuations of the dinar. In the one-year period ending March 2019, the dinar appreciated 3.2 percent against the euro and depreciated 8.6 percent against the U.S. dollar. No evidence has been reported that Serbia engages in currency manipulation. According to the IMF, Serbia maintains a system free of restrictions on current international payments and transfers, except with respect to blocked pre-1991 foreign currency savings abroad.

Remittance Policies

Personal remittances constitute a significant source of income for Serbian households. In 2018, total remittances from abroad reached USD 3.1 billion, or approximately 7.2 percent of GDP.

The Law on Foreign Exchange Operations regulates investment remittances, which can occur freely and without limits. The Investment Law allows foreign investors to freely and without delay transfer all financial and other assets related to the investment to a foreign country, including profit, assets, dividends, royalties, interest, earnings share sales, proceeds from sale of capital and other receivables. The Foreign Investors’ Council, a business association of foreign investors, confirms that there are no limitations on investment remittances in Serbia.

Sovereign Wealth Funds

Serbia does not have a sovereign wealth fund.