Serbia and Croatia: caught in the crossfire June 7, 2010 5:54pm
by Neil MacDonald | Share With both Greece and Hungary in the financial firing line, it is little surprise that the countries located between Athens and Budapest are trying to keep their heads down. The states of the former Yugoslavia, headed by Serbia and Croatia, the two biggest, have noticed mounting pressure on their currencies, which are all tied to a greater or lesser extent to the euro. Like small trade-dependent economies elsewhere, they can try to mitigate the impact of the international turmoil but cannot escape it. Serbia today sold €80m from its reserve to limit reverberations on the local dinar. “Since the beginning of this year, we’ve sold €1bn in order to amortise too-large daily fluctuations,” Radovan Jelasic, bank governor, told the FT. “Regional events are having the main impact on exchange rates now.” With a ratio of public debt to Gross Domestic Product of just 35 per cent, the Serbian state is living well within its means. In Croatia, where borrowing has long run higher, the figure is 50 per cent. But that still pales in comparison with Hungary (around 80 per cent) and Greece (130 per cent at the end of 2009). Serbia has a $4bn stand-by arrangement with the International Monetary Fund but has barely drawn on it. Croatia has no IMF support package at all. Among the smaller ex-Yugoslav entities, Bosnia and Kosovo have IMF plans in place, Macedonia has not while Montenegro is in talks with the Fund. By contrast, Greece, Hungary and Romania, all neighbours of ex-Yugoslav states, have combined IMF/European Union support packages totalling €150bn. Of the western Balkan states, Serbia allows the biggest fluctuations of its managed-float currency, with the dinar trading around 103 per € today after declining modestly for most of this year. Croatia’s kuna appears to be firmly anchored now at 7.25 to the euro, as officials count on summer tourism revenues to again shore up euro reserves. The western Balkan region is closely tied to the eurozone for trade, so the trade effects of the recent drop in the European Union’s common currency are limited. For example, about three-quarters of Serbian imports, exports and foreign debt are euro-denominated. Croatia, expected to join the EU in less than two years, is similarly euro dependent. For both perhaps the biggest consequence of a falling euro are rising oil import costs. Although Greek banks hold 15 per cent market share, Serbia has escaped overt economic damage. EFG Eurobank, National Bank of Greece and others have reiterated their commitment to stay in the Serbian market, where they reap higher interest rates than in the EU. But there are reports that one of Serbia’s Greek banks may have repatriated euros to its Greek holding group. Blic, a sober Belgrade tabloid, suggested (article available in English) on June 6 that the Greek crisis had hurt the dinar. “They’re far more profitable in Serbia than they are in Greece at the moment,” said a Balkan economist, whose bank rules prevent him from being named. “But that doesn’t mean they can remain immune forever to problems at home.” For Croatia, with no Greek banks, direct fall-out fears from the Greek crisis have been remote. There are extensive economic links with neighbouring Hungary. MOL, the Hungarian oil firm, holds 47 per cent of Croatia’s INA. However, in the key banking sector west European banking groups dominate and Hungarian banks have only a limited presence. OTP, Hungary’s biggest bank, holds only a 3 per cent market share in Croatia. However, with global investors feeling risk-averse, neither Serbia nor Croatia has reason to be comfortable. Many foreign investors who had thought to invest in kuna- or dinar-denominated instruments have put their money elsewhere for now. Jelasic said: “We are in for a very hot summer as far as emerging markets are concerned.” When a central bank governor speaks in these terms, investors would be wise to take note. © The financial Times Ltd 2009 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
