China Making Good On Investment Pledges

BMI View: In light of Serbia's broader economic position, we see Chinese investment continuing to look particularly attractive in developing the country's aging infrastructure. Chinese companies have established themselves in the geographically strategic market and look set to use the country as a base for further expansion within Europe. The EU candidate country will continue to receive funding from the rest of Europe to promote integration, but the no-strings attached funding of China will look increasingly attractive over the short-term as the country struggles with austerity measures.

Building on an increasingly strong relationship despite Serbia being on the path to European Union (EU) membership, China continues to invest in the country, with the announcement of new deals for power and transport projects as part of a US$10bn credit line for Eastern Europe. Serbia's infrastructure is in need of huge investment to update its Soviet era transport and power networks and with the country garnering the attention of both European and Chinese development assistance, we expect the construction sector to become increasingly active over the coming years.

In a deal first floated over a year ago, China Machinery Engineering Corp. (CMEC) has now signed a US$716mn deal to build Serbia's first new coal-fired power plant unit in 23 years. The new power generation unit at the Kostolac power plant beside the Danube in central Serbia will be 85% funded by a loan from China Export-Import Bank. Kostolac is already being refurbished by CMEC to bring it in line with EU regulations, after the company signed a deal with the state-owned Electric Power of Serbia (EPS) in April 2013 ( see 'Over-Reliance On South Stream Creates Downside', July 15). Parliamentary approval for the borrowing and state guarantee for the loan is expected by the end of the year, with construction to start in early 2014 and commissioning scheduled for 2019. The 15-year loan has a 3% interest rate and a five-year grace period. Serbia needs to add 2,000MW of installed energy capacity to its existing 8,360MW after failing to make significant additions to output for almost three decades.

Loans Key As Economy Struggles
Real GDP and Fixed Capital Formation Growth, % change year-on-year

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This article is tagged to:
Sector: Infrastructure
Geography: Serbia

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