|Dejan Soskic resigned as governor of the National Bank of Serbia on August 2|
In May the countrys voters elected a president, Tomislav Nikolic, whose unfortunate nickname is Toma the Gravedigger. Nikolic has been described as an ultra-nationalist and is the former deputy prime minister to the late Serb strongman Slobodan Milosevic. Ivica Dacic, Milosevics wartime spokesman, was sworn in as prime minister in July.
But it is more recent events that have prompted investors to shed Serbian assets in droves.
Shockwaves from the August 2 resignation of Dejan Soskic, governor of the National Bank of Serbia (NBS), were still being felt when one of his deputies, Bojan Markovic, quit four days later.
Observers believe both men, appointees of former president Boris Tadic, jumped before they were pushed. Both are opposed to the new presidents apparent attempts to undermine central bank independence through a new law to allow (and, many say, perhaps force) the NBS to buy public-sector debt.
Soskics departure was publicly mourned by the remaining NBS management, which said the new law might lead to a "major weakening" of central bank powers. In a statement reported by Reuters, Soskic warned that the law "would have severe consequences for the financial stability and credibility of the state".
Board independence threatened
In an email to Euromoney, Markovic also said stipulations in the new law that the NBSs entire top management must be reappointed within 90 days of the governor resigning had the "potential to impede [the] independence of board members" by creating a "pattern of abrupt, rather than gradual" future management appointments. Nikolics rush to pass the law, Markovic added, might further "raise uncertainty and market volatility".
Even the threat of the new law, which remained in draft form in late summer, was enough to raise hackles at the highest international bureaucratic levels.
The IMF said that if the new law allowed the government to force the NBS to buy debt issued by state bodies or enterprises, it would amount to "indirect [...] financing of the public sector", posing clear risks to the countrys exchange rate and level of foreign reserves. The IMF also warned that such moves threatened renegotiations of Serbias 1 billion loan, which the Fund suspended in February 2012 over spending disputes.
EU officials condemned the move by a country still seeking full EU member status. In answer to questions from Euromoney, Adriano Martins, deputy head of the EU delegation to Serbia, condemned the "politicization of the NBS", which, he said, "certainly does not contribute to accelerate" Serbias attempts to join the EU.
Martins added: "European central bank laws stipulate that governors should not be dismissed unless they no longer fulfil the requirements of their duties or unless they are guilty of serious misconduct."
What happens next? By any measure, Serbias economy is struggling, with more than 25% of adult Serbs out of work and inflation expected to top 10% by the year-end. Belgrade is also desperate to cut its twin current account and budget deficits, currently running at 14% and 7%, respectively. Some analysts fear a future where foreign reserves can be more easily plundered by politically motivated governments of all hues to plug holes in state finances.
One outcome might be that the NBS will be forced via the law to dip into national reserves to buy debt issued by overmanned, loss-making and poorly managed state institutions such as Serbian Railways and natural gas company Srbijagas.
"Serbia should be reforming these backward state enterprises rather than propping them up financially," says Andrew Roberts, managing director of Belgrade-based consultancy Eastern Europe Economics. "To finance state losses with the countrys foreign exchange reserves would be a very poor outcome."
Many believe the system desperately needs deeper and more painful reforms. Similar to some other countries in the region, Serbia suffers from what political analysts call particracy: the dominance of civil and judicial society by political parties. As such, new presidents look to replace senior officials with friends on their side of the political fence.
The NBS is one example: no NBS governor has completed a full four-year term since Milosevic was ousted in 2000. "Every Serb government feels it has the right to interfere with the NBS, directly or indirectly," says Roberts.
But as Serbia tries to join the EU, the proposed new law and the departure of Soskic do nothing to improve the situation. Furthermore, views are mixed on the incoming governor, Jorgovanka Tabakovic. Some describe her as an able economist, although Roberts characterizes her as merely a political hack.
Tabakovic surprised many investors and analysts by in August increasing interest rates by 25 basis points, continuing the efforts of her predecessor to damp down inflation. In a September 6 note, RBS predicted an imminent second rate increase, by either 25bp or 50bp.
RBS said it "took some comfort" in Tabakovics decision, one that clearly went counter to Nikolics publicly stated efforts to cut the cost of borrowing and boost economic growth. But the note said investors "still need to learn a lot more about [...] the influence that the government has over her".