Serbia Autos Report Q4 2009

Fiat’s move into Zastava (the largest foreign investment to date in Serbia) affords a massive boost of confidence in the potentially struggling Serbian car industry – an industry which is faced with a possible slowdown in foreign interest, drops in FDI and the generally non-conducive global credit climate. The report forecasts that in 2009 car sales growth will stand at 4.365 , which is a significant decline considering the rapid expansion seen in the sector in recent years (in 2007 passenger car sales increased by 20% y-o-y).

However, a rapid recovery is envisaged for 2010, with passenger car sales growing 11.2% to US$1.2bn.

Meanwhile, total automotive production will increase to 116,425 units, driven by the Fiat investment at the Zastava plant.

The domestic car sector will very likely emerge in good shape in 2010, which is illustrated by Fiat’s obvious vote of confidence. The company has pumped about EUR 1.5mn into the Zastava plant to date, a small part of the investment target of EUR200mn and EUR700mn for 2009 and 2011 respectively – although this may be subject to downgrading due to unseen effects of the global crisis.

Fiat has said its decision to invest in Serbia is part of its way of adapting to changing global realities and a changing global market. The investment, in turn, has helped to enhance Serbia’s competitive advantage, which is based around: a relatively highly skilled workforce, its reputation as a cheap production base, and it advantageous location between the markets of Russia and the EU. Export potential will obviously depend to some extent on exchange rate movements, which will have an obvious impact on the competitiveness of cars made in Serbia and exported.

Meanwhile, Fiat’s decision to raise production comes after the government initiated a EUR 1,000 car scrapping scheme on April 15, in which people can replace cars more than 10 years old for new Puntos.

The buyer pays EUR 5,999 for a new car and the state subsidises the remaining EUR 1,000 of the price.

The programme is reportedly doing well so far as public interest currently far exceeds Zastava's production capacity.

The election of a more pro-Western government has also clearly helped, although some of Fiat’s parts suppliers – a key element for the local and regional economy and community – are waiting to see when the government will decide to sell its 30% stake in the company before investing in the country and setting up plants. The government is also set to invest EUR300 million in new infrastructure projects which will include the rejuvenation of the road and railway network in the Kragujevac region – where the Zastava plant is located.

In July, the IMF upped its financial support to EUR 2.94bn for Serbia, about 560% of the country’s quota or almost 10% of GDP. It also extended the deadline of the programme by a year – to mid-April 2011.

The sharp deterioration in the external environment and trade flows (in particular), as well as in output, domestic demand and fiscal revenues, drove Serbia to ask for more help. In turn, Serbia has revised its 2009 budget, cutting spending and guaranteeing a general government deficit of, at most, 3% of GDP, also agreeing with the main foreign banks to re-finance all private sector debt due in 2009.