Politics 

Serbia enters the new year with uncertainty on two fronts: the domestic discontent with President Aleksandar Vucic among a segment of the population, together with escalating tensions with Pristina. Overall, the country seems set for a politically unstable year in 2019.

Mass protests against the president, who critics accused of being “autocratic”, took place on December 8 and 15. Initially sparked by an attack on opposition politician Borko Stevanovic, the protests have broadened to express a range of grievances, from Vucic's style of government to the need for a better police force and healthcare system. 

Previous waves of protests, mainly by urban Serbians for example the “Yellow Duck” protests against the Belgrade Waterfront development, have failed to dent the hold Vucic’s Serbian Progressive Party (SNS) has over politics in the country. However, while saying he will not meet any of the protesters’ demands, media reported in mid-December that Vucic is considering calling yet another early general election in spring 2019. 

Vucic has several times used elections to consolidate the SNS’s position and pave the way for potentially unpopular policies. If it takes place, this will be the fourth election since Vucic’s Serbian Progressive Party came to power in 2012. The previous, also snap, election was held in April 2016 and a new regular vote is due in 2020. 

An early election could also be a way to prepare for a potential deal with Kosovo, which would inevitably cause a strong reaction within Serbia, but is a prerequisite for Serbia to make progress towards EU accession. 

Serbia, alongside Montenegro are the frontrunners in the region’s EU perspective, and a European Commission strategy published earlier this year proposed 2025 as the accession date for both countries. However, Serbia’s unresolved issues with Kosovo are halting its progress.

“With all energy focused on adopting and implementing reforms, in particular in the rule of law chapters and on the normalisation of relations with Kosovo, more chapters could be opened in the months to come. The European Parliament stands ready to further support Serbia on its European path,” the statement of the EP said.

A potential land swap with Kosovo was also pointed out as possible source of issues. This has been under discussion as a potential way to reach a final resolution, but faced strong criticism amid concerns about the fate of ethnic minorities in the affected areas and the precedent it could set for territorial demands elsewhere in the region

Regarding land swap MEPs underlined that ethnically homogeneous states should not be the objective in the region. They consider any future agreement acceptable only if mutually agreed between Serbia and Kosovo and if it takes into account the overall stability in the region and international law.

But while a potential solution to the longstanding crisis seemed within grasp earlier in 2018, in the final months of the year relations deteriorated dramatically.  

The EU-mediated dialogue stalled in September 2018, an two months later Kosovo introduced 100% import tariffs for products from Serbia, as well as from Bosnia.

Despite the EU pressure, Kosovan Prime Minister Ramush Haradinaj said that the measure will be lifted only if Belgrade recognize Kosovo, which was former Serbian province and gained independence in 2008 .

The measure affected greatly Serbian traders, as Serbia is one of the main trade partners of Kosovo.

However, Serbia decided not to take retaliatory measures for the time being.

The relations between Belgrade and Pristina further worsen after Kosovo’s Parliament decided to set up a regular army on December 14 by transforming the Kosovo Security Force (KSF).

Serbian Prime Minister Ana Brnabic did not exclude army intervention if Kosovo goes on with the plans to form an army, even though according to experts this is unlikely to happen.

Serbian President Aleksandar Vucic sought help from Russia and China in regard with the issue.

Economics 

Serbia’s economy, which is seen to post a higher than expected economic growth in 2018, will expand at slower pace in 2019, but will remain robust thanks to strong domestic demand. At the same time,

The economic growth is expected to slow to 3.5% in 2019 from at least 4% in 2018, according to the European Bank for Reconstruction and Development and the International Monetary Fund’s latest forecast. The government’s expectation matches these projections as well.

The European Commission had more optimistic prognosis that Serbia’s economy will expand by 3.8%.

Despite the slight differences in the forecasts, all international institutions have noted that the economy will be driven by strong domestic demand, which came thanks to rising private and public consumption, but also to changes in inventories and double-digit investment growth.

According to Fitch, Serbia’s GDP growth will slow to 3.2% in 2019 and 2020 as the country’s medium-term potential growth is constrained by several factors, including negative population growth and relatively low domestic savings ratio.

Serbia's economic growth has fluctuated in recent years, with the economy taking a hit first from widespread flooding in 2014 and later from the poor harvest in 2017. The country posted GDP growth of 2.8% and 1.9% in 2016 and 2017 respectively, but went on to post stronger GDP growth in 2018.

Inflation is seen rising to 2.3% in 2019 from projected 2.1% in 2018.

Finance 

Serbia has significantly improved its public finances during the past three years, mainly thanks to the precautionary €1.2bn three-year stand-by arrangement (SBA) approved by the IMF in February 2015.

The SBA was followed up by a new programme for macroeconomic and structural reforms supported by the Policy Coordination Instrument (PCI). The PCI, which was approved by the IMF in July 2018, is an advisory programme, and does not foresee the use of IMF funds. It has been approved for a period of 30 months. Five semiannual programme reviews are planned during this period.

Serbia is expected to end 2018 with a budget surplus of 0.6% of GDP, which should turn to a 0.4% deficit in 2019 as agreed with the IMF. The country is expected to focus in 2019 on public investment, reduction in the labour tax burden, and measures to improve standards of living, using fiscal space generated by previous consolidation.

Business 

In 2019, Serbia will most likely start the construction of its stretch of the second line of the Turkish Stream (TurkStream) pipeline, which will extend the pipeline to Europe. The country plans to borrow €70mn for the project from five banks. Societe Generale’s local arm, state-owned Komercijalna Banka, Banka Postanska Stedionica and OTP Bank Serbia have agreed to lend €10mn each, with Vojvodjanska Banka to lend the remaining €30mn.

In 2019, the government will also put efforts in preparation of the construction of the first section of a motorway that will link the capitals of Serbia and Bosnia. The project is worth €250mn. The construction of the highway is aimed at creating a better connection between the two countries and will enable faster regional development. Serbia will invest €1.05bn in the construction of its part of the motorway linking Belgrade to Sarajevo. The first section runs from Sremska Raca to Kuzmin and will be built by Turkey’s Tasyapi Group.

The government also will focus on water transportation projects, spending €200mn loan from the EIB. Another €200mn will go for modernization of Serbia’s healthcare system.

In the private sector, Serbia is reaping the benefits of its progress towards EU accession, with investors seeking to take advantage of the low cost destination on the border of the EU, as well as an expected increase in consumer spending as incomes grow. So while Serbia has seen investments into the manufacturing sector — a notable recent announcement was that Chinese car parts producer and trader Minth will open a plant in Serbia with a €100mn investment creating 1,000 jobs — there have also been a number of investments into consumer sectors. Among the investors are Ikea, which followed up the opening of its first store in the country in 2017 with the announcement that it will open a €50mn retail park in Belgrade by the end of 2020.