Fitch upgrades Serbia’s rating to BB-, sees economy growing 2.4% in 2016

By bne IntelliNews June 20, 2016

Fitch Ratings has upgraded Serbia's long-term foreign and local currency issuer default ratings (IDR) to BB- from B+ with a stable outlook, the ratings agency said on June 17. It also revised its projections for the country’s GDP in 2016 from 1.7% to 2.4%.

The rating improvement is expected to contribute to Serbia’s efforts to attract more foreign investors and accelerate its economic recovery and growth. In January, Standard & Poor’s (S&P) affirmed its BB-/B ratings on Serbia but improved the outlook to stable from negative.

Fitch said the rating upgrade reflects fiscal consolidation measures which narrowed Serbia’s deficit to 3.8% of GDP in 2015, a significant improvement on the 6.6% posted in 2014.

“This partly relied on one-off factors. However, the underlying improvement in the deficit is estimated at around 2.5pp. This came from reductions in pension payments and salaries on the expenditure side (around 1.5pp), and higher economic growth on the revenue side (around 1pp),” Fitch said on June 17.

Fitch expects Serbia’s fiscal consolidation and moderate real GDP growth rates to continue in the coming years, keeping the fiscal deficit at 3.3% of GDP in 2016 and around 3% of GDP from 2017, and putting the government debt to GDP ratio on a downward path.

Serbia’s consolidated budget deficit stood at RSD26.71bn (€217.18mn) in January-April 2016, which was just half the expected RSD50bn.

The country’s consolidated budget deficit for the full year 2015 stood at RSD148.6bn, significantly shrinking from RSD258.13bn in 2014 and RSD212.1bn in 2013, according to the ministry of finance’s data.

The country managed to bring its deficit for 2015 significantly below the ceiling envisaged under the precautionary €1.2bn three-year stand-by arrangement (SBA) with the International Monetary Fund (IMF). Under the SBA, the country’s deficit was expected to reach RSD232.1bn but the IMF decreased it to RSD162.1bn in November 2015, after the third review of the SBA, approved in February 2015.

Serbia’s government reduced public wages and salaries approximately by 10% in November 2014, as one of its first public finance consolidation measures. A year later, the IMF allowed the government to make a small increase as of January 1, 2016.

Fitch sees the SBA as an important pillar of good performances that led to affirmation of the Serbian rating. “The government's commitment to reform appears to be strong, with the three-year IMF Stand-By Arrangement (IMF SBA) acting as a powerful policy anchor,” the agency said.

However, Fitch warned that some of the most challenging IMF-mandated reforms, notably reform of SOEs, the resolution of strategic public enterprises that have been protected from creditors, and the "rightsizing" of the public sector workforce, are still ahead.

The IMF has been criticising the slow progress on the restructuring and privatisation of state-owned companies as well as public sector workforce reduction.

Anyway, Fitch expects Serbia’s 2016 growth to reach 2.4% thanks to investment and net exports. “The economy returned to growth in 2015, expanding by 0.7%. Growth was driven by investment and net exports. In 1Q16 the economy expanded by 3.5% y/y, the fastest rate since 2013,” Fitch said.

According to the rating agency the public debt/GDP ratio is expected to peak at around 77% of GDP in 2016, before falling to 74% by 2018. Serbia’s general government public debt amounted to RSD3,024.42bn (€24.67bn) or 72.5% of GDP on April 30, preliminary data from the ministry of finance’s public debt administration showed. Serbia ended 2015 with public debt of RSD3,069.82bn or 75.5% of GDP.

Fitch assumes that the government will maintain its proposed reform and fiscal consolidation agenda, in line with the IMF agreement.

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