1. This statement provides information that has become available since the issuance of the staff report. The additional information does not change the thrust of the staff appraisal.
2. The key parameters of the draft 2010 budget submitted to parliament are in line with the program, but there were some changes in the structure of spending. Higher allocations for wages and goods and services (about ¾ percent of GDP), which are mostly related to EU commitments including liberalization of the visa regime, were compensated by lower spending on subsidies, net lending, and capital.
3. As expected, annual inflation rose to 5.9 percent (y-o-y) in November, up from 5.2 percent in October. The end-year inflation forecast of 7.5 percent made at the time of the mission is still within reach due to the base effect from an unusually low inflation figure in December 2008. At its December 14 meeting, the NBS’s Monetary Policy Committee left the policy rate unchanged at 10 percent, describing the current monetary stance as consistent with the inflation target.
4. On December 4, the NBS intervened for the first time in nine months in the FX market on account of increased exchange rate volatility. The one-off move was reportedly designed to compensate for a temporary surge in end-year FX demand, when many firms traditionally repay loans. The dinar has depreciated slightly against the euro, but there are currently no indications of fundamental exchange rate pressures going forward.
5. EU foreign ministers agreed to unfreeze the interim trade deal with Serbia, which represents the trade-related part of the Stabilization and Association Agreement (SAA). The interim trade deal had remained frozen since its signature in April 2008. The decision to unfreeze the agreement came after the Netherlands, which had previously blocked the trade pact, viewed the latest report on Serbia’s cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) as positive.
6. Standard & Poor’s (S&P) upgraded the outlook on Serbia’s credit ratings from negative to stable, citing eased external pressures amid the ongoing narrowing of the country’s current account deficit and its commitment to consolidate the budget in the medium-term in line with the SBA with the IMF. S&P affirmed ‘BB-’ long-term and ‘B’ short-term sovereign credit ratings for Serbia. S&P suggested that the outlook could be further upgraded if Serbia follows up with reforms of its public administration and pension system, making public finances more sustainable.