Fitch Ratings said it has affirmed Serbia's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' with negative outlook, reflecting the uncertainties around its public finances.

The agency said in a July 26 statement it has also affirmed the short-term foreign currency IDR at 'B' and the Country Ceiling at 'BB-'.

Fitch said it was mainly concerned about large fiscal deficit, which it sees still close to 6% of GDP this year, only marginally down from last year's 6.4% of GDP. In 2014, the budget gap should shrink to 5% of GDP.

Furthermore, Fitch sees the public debt rising to 65% of GDP by 2014, up from current around 60% of GDP, while the vulnerability of the local dinar currency will continue to weigh on its tolerance since nearly 82% of it is denominated in foreign currency.

The economy is expected to recover this year thanks to the automotive industry with the GDP growing 2% after contracting 1.6% last year. The current account deficit should narrow to 7.1% of GDP at the end of 2013.

Fitch pointed to the government's already funded plan to restructure state-owned companies, warning it still needs to demonstrate political will for the unpopular measures. On the other hand, no progress has been yet made on a comprehensive pension system reform, the agency added.

As far as Serbia's delayed deal with the IMF is concerned, Fitch said it believes a precautionary agreement would promote investor confidence and guard against more shocks coming from  global risks. Belgrade admitted it will not be able to sign an arrangement with the Fund by end-2013 since it is not ready to meet some of the necessary conditions, in particular the ones related to public wages and pensions' cut.

Finally, Serbia's rating is supported by its high income per head, superior human development and ease of doing business indicators in comparison to rating peers, Fitch said. The EU's recent decision to open accession talks with Serbia by January 2014 has also helped support the rating.

The negative outlook, however, reflects several risk factors that may could result in a rating downgrade. They include a failure to implement sufficient fiscal consolidation to put public debt on a sustainable path; a recurrence of balance of payments pressures leading to a fall in reserves and a sharp fall in the exchange rate; a worsening of the crisis in the eurozone - one of Serbia's main trading partners and financial channels.

If Serbia implements a credible medium term fiscal consolidation programme that stabilises public debt/GDP and makes progress on structural reforms thus speeding up the economic recovery and narrowing of external imbalances, Fitch would upgrade the rating outlook to stable.