Political risk and uncertainty aren’t good friends to a stimulating investment environment. As such, any rise in the perception of increased political risk for foreign investors in Serbia implies a reduction in their interest in investing in the country
During all periods of serious geopolitical disturbances, significant economic challenges and risks are faced by small, open economies like Serbia’s. In the event that the conflict in Ukraine becomes protracted, we can expect – regardless of Serbia’s commitment to sanctions against Russia – continued inflationary pressures and a slowdown in Serbia’s economic growth during 2022 and 2023. At the same time, the currently announced (according to the latest interest rate projections published by the U.S. Federal Reserve and the European Central Bank until 2024) tightening of monetary policy in developed countries will lead to tighter conditions for borrowing and servicing existing debt, which will have a negative impact on the budgets of households over the next two years, but also company balance sheets and investment decisions. In the case of the scenario that you mention in the form of sanctions imposed against Russia, I don’t think either decision would lead to a catastrophic scenario for the Serbian economy and a shortage of basic necessities.
In the event that the conflict in Ukraine becomes protracted, we can expect – regardless of Serbia’s commitment to sanctions against Russia – continued inflationary pressures and a slowdown in Serbia’s economic growth during 2022 and 2023
However, Political risk and uncertainty aren’t good friends to a stimulating investment environment. As such, any rise in the perception of increased political risk for foreign investors in Serbia implies a reduction in their interest in investing in the country, particularly now that the global liquidity cake is shrinking and investors are becoming even more selective in the decisions they make. And that’s the case whether it relates to foreign direct investment or portfolio investments that are also important for the functioning of the domestic financial market and financing the start-up community. On the flip side, the imposing of sanctions against the Russian Federation brings with it the risk of the terms of the gas arrangement being changed and the seventh largest market for exports of Serbian products and services (accounting for just under 5% of total exports in 2021) being lost. Thus, from an economic perspective, decision makers should have already implemented measures to minimise the negative implications of some of these risks materialising.
This implies credibly curbing inflationary pressures, through time-adjusted and limited increases in targeted fiscal levies/reducing certain tax burdens, and concerted efforts to improve the business environment. On the other hand, it is essential to launch new initiatives aimed at diversifying the country’s energy sources. All told, as with the fundamentals of finance, if we are aware that a risk exists, then it is necessary to hedge as soon as possible, if that hasn’t already been done on time.
