Monday, May 19, 2008

Poison pill

I made some predictions in January about where Serbia was heading. There are few new factors since January:

  • It looks like exchange rate can be supported for some time by increasing percent of reserves held in local currency. Exchange rate is established in regulated daily inter bank trading and hence ability to control it. Serbia has thousands of Forex offices that were used to transform one black market activity into regulated one. I'm not sure if this equates to real market and whether any currency speculation can take place. Foreign reserves are at level 10 Bn EUR, hence there is some scope to support exchange rate in next 12 months. This means that eventual Radical government will have some grace period before temperature starts to rise.
  • Radical Party and DSS (Democratic Party of Serbia vs. now enemy Democratic Party- sounds like Palestine People's Front vs. Peoples Liberation Front from Life Of Brian) had 128 seats in previous parliament and now they have 108. This means that they lost majority (126 is a majority) and they need unreformed Socialist Party of Serbia (SPS) to form coalition. SPS might decide that their long term goals are better satisfied in coalition with Democratic Party. and hence support pro-EU block.
  • Serbia signed Stabilization and Association Agreement with EU on 29th April. Nationalists threatened that they will annul the agreement. This is the poison pill left by pro-EU block. If nationalists go ahead with annulling they will see macroeconomic stability being hurt very quickly. This will in turn get destroy their populist support base. If they do not annul the agreement (which is most likely) they will be proven hypocrites and this will not hurt them as much.
  • Socialist murmur about cost of social justice (increasing government pensions, new collective agreements etc.) and it is quite obvious that growth and investments will increase faster if country decisively pushes ahead with EU integration. I found amazing that nobody mentions progressive tax rates as solution (14% flat tax rate was introduced in 2003).
All in all, exhausting times are ahead.

There are strong interests of unreformed secret service BIA and tycoons to keep KoŇ°tunica in power.

At this point of time I see chances of pro-EU vs. nationalist government as 50%/50%.

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