One would hardly know it on a September Saturday evening in Belgrade, when an Indian summer brings temperatures of nearly 40 degrees celsius, sun-kissed locals party on floating bars in the Sava River and energetic turbo-folk music fills the balmy air, but Serbia is a country that has had little reason to revel in recent times.
A nasty war in the 1990s left the country battered and its international image tattered. Since then, the western Balkan republic – the largest country in the region and one of the most important economically – has been suffering a number of ills, ranging from geopolitical disputes, domestic political discord and torrential floods to fiscal imbalances and anaemic economic growth. More recently, Serbia has found itself a crossing-route for the huge tide of migrants fleeing war-torn Syria for western Europe, although the country has won plaudits for its humane treatment of these temporary visitors when compared with other nearby countries. Huge challenges remain, including a double-digit unemployment rate, but there are signs that Serbia might be turning a corner at last.
A new sense of security and stability prevails in Serbia, brought about by improved relations with its neighbours and the strong parliamentary majority that the current government enjoys. Long-overdue reforms have been carried out, and some of them, such as a speeding-up of the permitting process for the construction industry (see interview with deputy prime minister Zorana Mihajlovic), stand to significantly improve Serbia's business environment. A cross-party political consensus has formed around the urgency of EU membership, putting the country on the road to formal negations with Brussels.
Now, with many of the political uncertainties of the past having been laid to rest, Serbia has an opportunity to put the focus on economic stability and growth as well as on FDI. There is no question that Serbia needs FDI, not least to help it address its unemployment problem, and through the introduction of new reforms, a consolidation of its investment-promotion framework, improvements to its incentives regime and expansion of its free zones, the country is trying to demonstrate that it deserves more investment.
“With the political stability that we now have, we finally have a charted course. The emotions have settled and now it’s time to do business,” says Nenad Bjelogrlic, acting director of the Serbia Investment and Export Promotion Agency (Siepa).
The business community likes the way things are heading after so many years of stagnation. “There are new laws on labour, bankruptcy and other issues that are favourable to investors and business. Financial discipline is improving rapidly, and with EU negotiations – which we are optimistic we will open soon – there will be even more reforms and improvements. The stability and government mandate means laws can happen fast – we need to use this unique political situation to drive reforms. It’s good for business,” says Aleksandar Kemives, advisor to the president of the Chamber of Commerce and Industry of Serbia.
Below the macro level, there are changes bubbling up from the local level as well. The National Alliance for Local Economic Development (Naled) – a public-private association set up in 2006 by the US government agency USAid – has been working with local municipalities to improve their procedures for dealing with investors and businesses, awarding certification to those that meet certain international standards. “The municipalities are all improving their offers for investors and their procedures, as well as their mindsets about investment. Naled certification is incentivising that,” says Mr Kemives.
Serbian localities have a stronger hand to play in attracting investment than they might have had in the past. With labour costs rising in China and many companies seeking to shorten supply chains as they serve European customers, Serbia has a strengthened position geographically, which it hopes it can exploit for key export industries such as automotives.
“China is not the solution anymore for many industries,” says Pierluigi Ghione, president of the investors’ club in the Regional Chamber of Commerce in Niš in south-east Serbia, and factory manager for Grammer, a German manufacturer of car interiors that has expanded its Niš plant from 400 to more than 1400 employees in a matter of years. “The Balkans are in a strategic position. Here, we are not too far from customers [in such markets are Germany and Czech Republic] and it is not too expensive. It is low cost but not low quality. We just need to build up competences.” He says the company invests 3% of its returns in worker training.
In the city of Pirot, also in south-east Serbia, Michelin-owned Tigar Tyres serves Europe, the Commonwealth of Independent States, the Middle East and north Africa from its base in the local free zone. The 65-hectare site hosts production, R&D, a logistics centre and support services, and an engineering team is also being developed. Tigar has reinvested heavily in Pirot Free Zone, increasing capacity by 4 million tyres per year, and now employees more than 2700 people. Ninety percent of the production is exported.
Meanwhile, the largest US investor in Serbia and one of the largest overall, tobacco company Philip Morris, has invested more than $800m in Serbia since acquiring a privatised local firm in 2003. The company employs more than 900 total employees across Serbia, some 600 of them in . The factory is in expansion mode and the plan is to hire 200 more people in the immediate term. “Next year, in our next phase of investment, we will be doubling factory space and will become one of the top Philip Morris factories in Europe. We are already one of the biggest export factories,” says Nuno Sousa, director of operations, south-east Europe, at Philip Morris International.
“It’s a good time to be in Serbia. Because of the high unemployment rate, there is not a lot of competition [for workers], so you can get good people. It is very exciting at this moment — you see highly skilled people, ready to learn and grow.”
The workforce is a youthful one as well. “The average age of an unemployed person in Serbia is 32; in western Europe it is 41,” says Mr Ghione of Grammer.
Improvements to be made
One weak point in Serbia has been infrastructure, but some long-awaited improvements are finally under way, including the much-hyped 'Corridor X' roadway connecting Serbia with central Europe.
Investors complain of inconsistency in FDI incentives, but in response Siepa says it is reassessing the incentives regime to make it internationally competitive and more consistent and transparent. Free zones, and the special incentives they offer, look set to stay at the heart of efforts to boost investment and exports. There are currently 13 zones across the country employing nearly 20,000 people, with another soon to open in Belgrade. The biggest industry for the free zones is automotives. Italian auto giant Fiat shifted production to Serbia in 2012, giving the entire industry a major boost.
“Five of the biggest producers of wires and cables [for automotives] are in Serbia,” says Milan Ristic, director of the Free Zones Administration in the Ministry of Finance of Serbia. “We have a copper mine so we can produce the basic raw materials, we have metal and we have oil to make the plastic, so producing the wires is easy.” Mr Ristic adds production across all sectors in the free zones has increased tenfold times over the past five years, but the goal is for even more.
In addition to automotives, Serbia is also considered to have growth potential in sectors such as agribusiness, ICT, shared services centres, metals and energy.
After years of paralysis, now is a pivotal time for Serbia. “For the past few years we have been in no-man’s land. But some major projects are coming on and privatisations are happening, which will make 2016 a big year,” says Mr Bjelogrlic . “We’re seeing a lot more interest from tier-one companies and from the US, for example, so the quality of projects is improving.”
As internal as well as external factors coalesce to make Serbia more competitive, the country has a chance to step out of the FDI shadows. It is one that it cannot afford to lose.