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6. Financial Sector

Serbia welcomes both domestic and foreign portfolio investments and regulates them efficiently. The government removed most restrictions on short-term portfolio investments in April 2018. Residents of Serbia, both companies and persons, are now allowed to purchase foreign short-term securities issued by EU residents and EU countries, and by international financial organizations who have EU countries in their membership. Banks registered in Serbia can also purchase short-term securities issued by OECD countries. Foreigners may only purchase short-term securities in Serbia if they have residency and/or headquarters in EU countries. Payments related to long-term securities have no restriction.

In 2021, Serbia recorded net inflows of $1.6 billion in portfolio investment, according to the National Bank of Serbia. Analysts have explained this inflow mostly as a result of Serbia’s issuance of Eurobonds. The 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 $12.1 billion in December 2021, with 79% in dinars and 21% in euros. In addition, Serbia issued a total value of €7.3 billion of Eurobonds on the international market. The share of dinar denominated securities held by non-residents was 18%, which was equal to $1.8 billion at the end of December 2021.

Total Serbian government-issued debt instruments on the domestic and international markets stood at $20 billion in December 2021.

Serbia’s international credit ratings have improved since 2019 but remain below investment grade. In March 2021, Moody’s Investors Service upgraded Serbia’s long-term issuer and senior unsecured ratings from Ba3 to Ba2 while adjusting its outlook from positive to stable. In December 2021, S&P improved Serbia’s outlook from stable to positive and confirmed its BB+ rating. In February 2022, Fitch confirmed Serbia’s credit as BB+ with a stable outlook.

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 2021 was $380 million, a decrease of 16% from the prior year. Trading volumes have declined from a peak of $2.7 billion in 2007.

The Securities Commission, established in 1995, regulates the Serbian securities market. The Commission also supervises investment funds in accordance with the Investment Funds Law. As of February 2022, 19 registered investment funds operate in Serbia: .

Market terms determine credit allocation. In December 2021, the total volume of issued loans in the financial sector stood at $30 billion. Average interest rates, while, decreasing, are 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 62% of all lending is denominated in euros, 0.1% in Swiss francs, and 0.2% 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.

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.

Serbian SMEs often do not access credit, instead turning to friends or family when they need investment and operational funds. Only a few corporate and municipal bonds have been issued, and the financial market is not well developed. In April 2020, the government amended corporate-bond issuance legislation to increase companies’ access to financing in response to COVID-19’s economic impact. The amendments cut the timeline for issuing corporate bonds from 77 to 17 days and the price to issue a corporate bond from $88,000 to $11,000. This measure was in force until November 2020, during which time the total value of corporate bonds issued was $503 million, of which $440 million were issued by state-owned companies. Media reported that the National Bank of Serbia (NBS) purchased $275 million worth of the bonds.

NBS regulates the banking sector. Foreign banks may establish operations in Serbia, and foreigners may freely open both local currency and hard currency non-resident accounts. The banking sector comprises 91% of financial sector assets. As of November 2021, consolidation had reduced the sector to 23 banks with total assets of $49 billion (about 85% of GDP), with 89% of the market held by foreign-owned banks. The top ten banks, with country of ownership and estimated assets, are Banca Intesa (Italy, $7.6 billion in assets); OTP (Hungary, $6.4 billion); UniCredit (Italy, $5.3 billion); Komercijalna Banka (recently sold to Slovenia’s NLB Bank, $4.8 billion); Raiffeisen (Austria, $4.3 billion); Postanska Stedionica (Serbian government, $3.3 billion); Erste Bank (Austria, $3.1 billion) AIK Banka Nis (Serbia, $2.2 billion); Eurobank EFG (Greece, $2.1 billion); and Naša AIK Banka (Serbia – formerly Sberbank, $1.9 billion).

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposed sanctions against Russian banks, including Sberbank, on February 25, 2022, due to Russian aggression in Ukraine and prohibited corresponding relations with these banks. Serbia has not joined U.S. and EU sanctions against Russia. Still, these banks are likely to face significant obstacles in their operations in Serbia, including the inability to transfer assets to and from foreign countries. Until the imposition of banking sanctions, Sberbank’s Serbian affiliate was the only significant Russian bank in Serbia. Its sale to Serbia’s privately owned Agroindustrial Commercial Bank (AIK Bank) was completed March 1, 2022, and it changed its name to Naša AIK Banka.  Only two Russian banks are now operating in Serbia: API Bank and Expobank, with combined assets of approximately $300 million, constituting less than one percent of Serbia’s banking-sector assets.

For more information, see:

The IMF assessed in its December 2021 report on Serbia’s Policy Coordination Instrument that the banking system has been stable owing to adequate capitalization, high liquidity, and profitability. As of June 2021, banks’ capital adequacy was stable at 22.2%, well above the regulatory minimum of 8%, while asset quality is improving. Banks’ profitability remains robust with return-on-assets and return-on-equity ratios of 1.2% and 7.4% respectively in August 2021. From 2015 to December 2021, non-performing loans (NPLs) declined from 21.6% to 3.5 % of total Serbian loan portfolios, and NPLs are fully provisioned. Significant foreign-exchange risks remain, as 67% of all outstanding loans are indexed to foreign currencies, primarily the euro. In 2019, the government adopted a law that protected consumers who had taken mortgage loans denominated in Swiss francs by converting them into euros. Banks and the state shared losses resulting from the accompanying reduction of outstanding principal and interest balances. This law enabled borrowers to continue servicing debt on more favorable terms.

Serbia does not have a sovereign wealth fund.

7. State-Owned Enterprises

State-owned enterprises (SOEs) dominate many sectors of the economy, including energy, transportation, utilities, telecommunications, infrastructure, mining, and natural resource extraction. Serbia’s Agency for Business Registers (ABR) maintains a publicly available database of all SOEs on its website at . As of March 2022, according to this database, 266 SOEs are in normal operation, 42 are in bankruptcy, and two are in liquidation. However, the most recently available ABR annual report (pp. 29-32) recorded 545 SOEs employing a total of more than 114,000 people, or approximately 4% of the formal workforce and accounting for 6% of total business sector revenues. (The report for 2021 is expected to be published in June 2022.) At the beginning of 2022, 64 SOEs with a total of nearly 25,000 employees were slated to be resolved through privatization or bankruptcy, down from 90 companies in early 2019. The government has launched a privatization tendering process for two of those companies, and the Ministry of Economy is preparing 10-15 additional companies for divestiture (see Privatization Program, below).

The Law on Public Enterprises, adopted in February 2016, defines a public enterprise as “an enterprise pursuing an activity of common interest, founded by the State or Autonomous Province or a local government unit.” The law also defines “strategically important companies” as those in which the state has at least a 25% ownership share. The law aimed to introduce responsible corporate management in public companies and strengthen supervision over public companies’ management. The law requires that directors of public companies be selected through a public application procedure and that they not hold any political party positions while serving. The law also requires that a portion of public companies’ profits be paid directly to the state, provincial, or local government budget. However, Transparency International Serbia analyzed implementation of the law in an ad hoc report in September 2017 and concluded that almost none of these requirements have been implemented, including the professionalization and transparency of management. The full report can be seen at:

SOEs can purchase goods from the private sector and foreign firms under the Public Procurement Law. For example, foreign companies regularly win public tenders for the construction of roads and other infrastructure projects. Under the Public Procurement Law, a buyer must select a domestic supplier if the domestic supplier’s price is no more than 5% higher than a foreign supplier’s price. The Public Procurement Office, an independent state body, supervises implementation of the Law on Public Procurement. Serbia, not yet a member of the WTO, is not a party to the WTO’s Government Procurement Agreement.

Private enterprises have the same access to financing, land, and raw materials as SOEs, as well as the same tax burden and rebate policies. However, the IMF estimated that in 2014, SOEs enjoyed benefits amounting to approximately 2% of GDP.

The IMF has recommended that the government phase out support for SOEs. In 2016, Serbia committed to significantly reduce the fiscal cost of SOEs by curtailing direct and indirect subsidies, strictly limiting the issuance of new guarantees, and enhancing the accountability, transparency, and monitoring of SOEs. This goal remains a key element of Serbia’s current IMF program. The government decreased the level of quasi-fiscal support (issuing of new guarantees) from $860 million in 2016 to $110 million in 2020. In the latest IMF program, launched in June 2021, the IMF stressed the importance of advancing the SOE reform agenda, including improving corporate governance. Serbia, with EBRD support, adopted an action plan to implement a new ownership and governance strategy for SOEs in June 2021. The Action Plan is posted online at: .

From 2001 through 2015, the Serbian government privatized 3,047 SOEs. The government cancelled 646 of these privatizations, alleging that investors did not meet contractual obligations related to employment and investment. According to the Privatization Law, the deadline for the privatization of the 646 companies in the Privatization Agency’s portfolio was December 31, 2015. However, 62 companies were still unresolved as of February 2022. These companies include health spas, veterinary stations, and companies located in Kosovo, among others. Most significantly, the Ministry of Economy must still resolve several large, strategically important SOEs including the Resavica coal mine in east-central Serbia, chemical company MSK Kikinda, and others. In many cases, closing these companies would do serious damage to their local economies, where they are key employers. The government continues to engage foreign investors in the privatization process, inviting them to submit bids, participate in auctions, and purchase company shares. Invitations for privatization and bidding are published on the Ministry of Economy website at .

In December 2018, France-based Vinci Airports took over operation of Belgrade’s Nikola Tesla Airport under a 25-year concession agreement. According to official statements, Vinci had offered €501 million to manage the airport and €732 million in investment, as well as an annual fee of up to €16 million. At the end of 2020, the government completed the sale of the country’s second largest bank, Komercijalna Banka, to Slovenia’s NLB bank. The government sold the petrochemical company Petrohemija to the Russian majority-owned petroleum company Naftna Industrija Serbije (NIS) in December 2021. The government has started the process of converting the country’s largest SOE, the power utility EPS, into a joint share-holding company as recommended by the IMF, but the IMF has not recommended fully privatizing the company, and the government has no plans to do so. The government plans to privatize three companies in 2022: river shipping company Jugoslovensko rečno brodarstvo, Hotel Slavija in Belgrade, and transport company Lasta.

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