“I don’t think that the government has fundamentally important instruments to help companies and influence business activity, since we can no longer obtain loans while other financial sources are uncertain“

 The  former  minister,  now  a  member  of  parliament, president of the Economics Institute, a businessman, and  a  person  with  strong  business  contacts  outside Serbia  is  rather  vocal  about  his  concern  with  what
awaits the Serbian economy next year. When asked to grade the current economic situation in the country from 1 to 10, Vlahović says that it is below 5, adding that, several months ago, it was definitely a strong 6. He underlines that the situation has been exacerbated for several reasons.
- The second tide of the crisis will leave behind multiple consequences. It has already gripped our key EU export markets and we are really going to feel it. In addition, capital influx will be substantially  reduced  and  we  are  a  highly  dependent  economy  whether talking  about  Greenfield  investments  or  cross-border  loans.  The biggest foreign capital influx this year was Belgian Delhaize’s investment through the acquisition of Delta Maxi for €930m, which did  aff ect  the  stability  of  the dinar exchange rate quite a lot. On top of that, many companies are slowly carrying out loan discharge, with the banks expected to do the same soon. For now, we are talking about a term loan discharge as stipulated in relevant contracts, but many companies still have liquidity problems. This is the eff ect of the crisis, which is also visible in unpaid loans that currently stand at 20% and are constantly growing. The crisis is spilling over from the real sector into banks.

■ Did the government prepare its response to the second wave of crisis?
-  Two  years  ago,  the  government  did  have  a  response,  it  encouraged spending. During that period, the level of foreign debt went up and that money was used in the implementation of large-scale infrastructural  work.  On  the  other  hand,  commercial  banks  were stimulated through subsidized interest rates and that helped with maintaining some kind of credit activity to benefit domestic businesses. Now, we have a problem. The question is whether the government has any fundamentally important instruments to support economic activity in a similar fashion. I don’t think it has if we consider that providing investment incentives, as it has been doing for  the  past  two  years,  is  now impossible.  We  cannot  borrow any  longer  since  public  debt has almost reached the limit of 45% of GDP and there is no other way to borrow more, other than in changing that limit. In the long run, further borrowing would not be good since this 45% limit has not been set arbitrarily, but has been adjusted to the structure of  the Serbian economy.

■ So, where can we fi nd the money that our economy needs?
- Apart from re-arranging budget spending to benefit the agricultural budget, I see no other options. The agricultural budget needs to  be  significantly  higher  next  year  since  agriculture,  together with  energy,  is  the  driving  force  of  our  economy’s  growth.  Agribusiness can double its contribution to the GDP growth in a very short amount of time. 

 

■ If exports to crisis-engulfed markets drops, can we at least re-direct food exports to Russia?
-  Our  entire  food  production  can  be  absorbed  by  Moscow  alone, not  to  mention  the  rest  of  Russia.  However,  there  is  no  joint  approach here. We miss the former business associations that were specialized and made it possible for companies to have joint access
to foreign markets. I believe that the government is able to allocate financial  stimuli  for  that and  the  Economics  Institute can certainly provide expert help.

 

■  You  say  that  energy and transportation are Serbia’s two other advantages. How can we better utilize them?
- I am not sure that we can fully utilize the energy potential without reforming the key public enterprises in this sector. I am mainly referring to the restructuring of Electric Power Industry of Serbia (EPS) and using various public-private partnership formats. So, including the private sector is possible, but that doesn’t necessarily need to happen through privatization and particularly not through privatizing the entire system, but rather parts of that system. This is still an untapped potential that can certainly exert a positive influence on the Serbian economy.

■ The banking sector has managed to stay on its feet following the fi rst impact of the crisis. What do you expect to happen now, with the second crisis wave?
-  Before  the  crisis,  a  very strong  banking sector  was our  advantage. However, I would refrain from ascertaining  its current  strength  regardless of its twice higher capital adequacy compared to the EU, and its high foreign currency reserves. On the other hand, the number and amount of loans that are not regularly paid  have  been  growing  month-on-month.  This  can  change  the image of our banking sector’s strength rather rapidly. Many large companies are dealing with liquidity issues and have been investing huge eff orts into fulfilling and maintaining their financial obligations. On the other hand, the public sector needs to be reformed and this entails fiscal adjustment and savings, primarily through reforming  the  pension  system  (which  has  been  untouchable  for the last 10 years), health system, education, advancing corporate management in public enterprises and their partial privatization.

■ Can banks be in jeopardy because of uncollectible loans?
- The loan collaterals, which are mostly in the form of real estate, are not that certain in today’s day and age. Real estate prices have dropped. Next year will be the year when the banking sector will have  to  “face  the  truth”,  i.e.  it  is  vital  for banks to carry out financial consolidation of all  companies  that  have  a  good  future  and to support these companies. Banks need to understand  that  the  collaterals  they  have are no longer as certain as they were up to 2008. The fact remains that there is no way to market such collaterals. It is much better to help the debtor to function normally with the  amended  loan  maturity  structure  and possible  debt  consolidation  or  a  write  off , providing that the debtor has a good business  perspective.  Until  now,  banks  were pretty unyielding and failed to understand
the situation that these companies were in.

 

■ Is it possible for banks in Serbia to run out of money for loans?
-  The  new  crisis  cannot  be resolved  by  only  applying the  usual  set  of  measures. Banks,   which   based   their activities  solely  on  capital received from their mother banks, are certainly in a more difficult situation. Now, this money is no longer available since the barriers  to  exporting  capital  have  been  put  in  place.  Many  Greek  and now  Austrian  banks  have  already  done  this,  and  we  expect  Italy to make a similar decision.  This is the ‘moment of truth’ that all of our banks will have to face. My stance is that businesses need to
warn the bank in advance that they will have trouble in meeting their financial obligations, as well as to sell their non-core assets ASAP. Only then can they ask the bank for an extension of the grace period, a possible conversion of short-term into long-term loans and to write off  a part of their debt. Banks will have to resort to that in the following period.

 

■ Can NBS do something in order to help both the banks and the real sector?
- To suggest applying measures that would jeopardize the country’s monetary system is not my place, but I do know that there are subtle ways in monetary policy to induce economic activity. Everybody keeps mentioning reducing the required reserves as this is where the money, that could be useful to the economy, is trapped. In addition,  there  needs  to  be  strong  and  specialized  monitoring  over daily market activities and the way in which this disengaged money should be spent. That money needs to be spent on the economy and production of new goods and new values. NBS can do that.

■ Some countries have turned to wealthy businesspeople for their  help.  Do  we  have  such  people  and  what  can  we  expect from them?
- If we are talking about very wealthy businessmen, we usually ascertain their wealth through their property since that is how you draw a conclusion on how wealthy they really are. But, when you view it from the standpoint of their total debt, then you get the real picture of the value of their capital which is rather small, if not non-existent.

■  Are  we  going  to  see  an  increase  in  the unemployment rate?
-  Let  me  remind  you  that  everybody  talked about lost jobs during the first impact of the crisis,  mentioning  a  figure  of  400,000.  This is not true. The number was much lower. All of these jobs were lost in the private and not state  sector.  It  was  quite  paradoxical  to  see
that  civil  servants  held  the  biggest  strikes. This  speaks  volumes  about  the  people  employed  by  the  “state”  and  their  privileged status compared to their counterparts in the private sector.

 

■  What  should  companies do in order to weather the crisis?
- It happens quite often that companies wait for the problem  to  come  and  only  then start doing something about it. Some think that this happens due to proprietor’s ignorance of the difficult situation, but I think that we are talking about bad management, which hasn’t progressed much since the time when these companies were much smaller and not able to realistically size up the problem. They told themselves  that  the  problem  would  be  solved  this  way  or  the  other. This ‘other way’ does not exist; there is no spell that can simply
magic away their problems.

■ Who has it easier – domestic or foreign investors?
- That is a very difficult question to answer. In both cases, a highly risky  business  environment  poses  a  danger  to  their  functioning. The state needs to eliminate those risks and clean up the situation. No foreign investors have left Serbia. However, if we bear in mind
that  everybody  is  operating  under  the  same  conditions  and  that domestic  companies  are  endangered,  then  it  is  highly  likely  that foreign companies are in the same position. Serbia is an attractive investment location since it has a strong growth potential and that
is what keeps the investors here. They definitely have better management and information that is more reliable. ■