The inflow of capital from abroad in April and May decreased by a third.
The German company MTU announced recently that it will postpone the beginning of its activities in Serbia by six months due to the global pandemic. The original plan of this aviation giant was to open a plane repair plant in Nova Pazova in two years. This company is probably not the only one. Foreign investors are postponing investments because they are obviously defending themselves from the crisis by saving. The inflow of capital from abroad, as an important driver of economic growth during April and May, was one third lower than in the same months of the previous year.
Bojan Stanic, assistant director of the Sector for Analytics of the Serbian Chamber of Commerce, says that the epidemic of Covid 19 contributed to a decline in this area as well, which was expected. However, thanks to the strong inflow in the first months of 2020, the absolute amount of inflow in the period January-May is certainly respectable and amounts to 1.3 billion euros.
– According to current information, none of the significant foreign investors has given up on the planned investments. Namely, due to the epidemiological situation in their home countries, and certainly in Serbia, some investments have been postponed for a period of three to six months – says Stanic for Politika.
Given that, according to the basic scenario of international financial institutions, a sudden recovery is expected in the next year, our interlocutor states that a strong inflow of foreign investments is expected to continue.
– The current inflow of foreign direct investments is sufficient to finance the current account deficit of the balance of payments. It should be borne in mind that due to the crisis, this year, the chronic current account deficit will be reduced to about five percent of GDP. Also, given that most analysts agree that, when it comes to the second wave of the epidemic (which is expected in the fall), the same closure measures should not be expected to be applied as was the case in the first wave. With such an approach, the realization of investments would have fewer technical limitations, which significantly contributed to the decline in investment activity in April and May – Stanic believes.
Ivan Nikolic, a senior research associate at the Institute of Economics in Belgrade, says that in May, net foreign direct investments amounted to 201 million euros, which is about 26 percent less than in the same month last year.
He stated that in the first five months of 2020, foreign direct investments were 11.7 percent or 166 million euros less than in the same period in 2019. He assessed that it is good that, when investments fall, the current account deficit decreases, which is 4.5 percent lower than in May last year.
– The current account deficit has been reduced primarily due to a smaller outflow of money on the basis of paid dividends and reinvestment of profits in Serbia – Nikolic explained for the Beta agency.
According to him, the state is making efforts to compensate for the decline in net foreign direct investment by increasing capital expenditures from the budget.
– Capital expenditures for the first five months of this year are higher by 239 million euros and have exceeded five percent of the gross domestic product (GDP) – said Nikolic.
He added that in this way, the state tries to maintain a high level of investment, which affects economic growth, when foreign direct investments fall.
The Fiscal Council also states that the available data show that there was a strong decrease in foreign direct investment in April.
– In April, they were one third less than in the same month of the previous year, and we expect this trend to continue and deepen by the end of the year due to the increase in global uncertainty. This means that Serbia will be left without an important driver of economic growth for some time – the Fiscal Council states in the latest report.
The authors point out that Serbia has a great asymmetry between domestic and foreign investments, by relying too much on foreign and too little on investments of the domestic private sector. Foreign investment in Serbia in the previous three years amounted to over seven percent of GDP, which is one third more than the average of Central and Eastern European countries, while domestic private sector investment in Serbia was approximately one third less than in Central and Eastern European countries.
– Since the recovery of foreign direct investment in the coming period is uncertain and does not depend on domestic economic policies, Serbia should compensate for this shortfall in investment in the short term by increasing public investment in infrastructure in 2021, and permanently improving the investment environment (rule of law anti-corruption) by stimulating investments of the domestic private sector – recommended by the Fiscal Council.
According to the data of the National Bank of Serbia, during 2018, the gross inflow of foreign direct investments in Serbia amounted to 3.5 billion euros (8.2 percent of GDP), and during 2019, a record inflow of 3.8 billion euros was recorded (3 percent of GDP).
Bojan Stanic says that in the last few years, Serbia has been a convincing leader in the region in attracting foreign investments due to its comparative advantages.
– The crisis, which is expected to be overcome at the turn of the next year, does not affect the policy of the Government of Serbia on the necessity of attracting FDI. However, the focus now is on attracting FDI, which bring higher added value, which would affect the production and export structure of Serbia in the period when the economic recovery begins – says Stanic, Politika reports.
