IMF commends Serbian recovery, warns over debt and structural issues

By bne IntelliNews September 1, 2016

The International Monetary Fund (IMF) completed the combined fourth and fifth reviews of its €1.2bn three-year stand-by arrangement (SBA) with Belgrade on August 31. In his concluding statement, IMF deputy managing director and acting chair at Tao Zhang said that Serbia’s economic recovery had exceeded expectations, supported by efforts to strengthen public finances, advance structural reforms and boost investment confidence.

The SBA, approved in February 2015, is intended to help Serbia achieve its 2015-2017 economic targets, restore public debt sustainability, strengthen competitiveness and growth, and boost the resilience of the financial sector. The deal with the IMF has already been an important driver of Serbia’s economic progress and the thorny issue of public finances stabilisation. Moody's Investors Service, Serbia's credit profile (B1 stable) has benefitted from the SBA.

The completion of the combined fourth and fifth reviews will make available the cumulative amount of SDR608.01mn (about €761.6mn) while the Serbian authorities have indicated their intention to continue treating the arrangement as precautionary.

Tim Ash of Nomura commented that Serbia is rapidly replacing Romania to become the “IMF’s poster child”. 

“[Serbian Prime Minister Aleksandar] Vucic can presumably now re-focus on EU accession and the public administration reforms which are really central to this IMF programme, plus I guess working the phones/airmiles to continue to keep FDI flows elevated - the big recent success of Serbia has been keeping net FDI inflows at around 5% of GDP,” Ash wrote in an analyst note. 

Despite the positive assessment of the results achieved so far, Zhang warned that vulnerabilities remain, including from elevated public debt and lingering structural challenges in an uncertain external environment.

“Full implementation of programme commitments is critical to strengthen the foundations for robust and inclusive growth, restore public debt sustainability, and rebuild policy buffers,” he said.

Serbia’s general government public debt increased slightly to RSD3,052.88bn or 73.6% of GDP on July 31, from RSD3,030.58bn (€24.58bn) or 73.1% of GDP at end- June. It returned to an upward trend in July after in June it decreased modestly against May, when it went up to 73.3% of GDP. The earlier downsizing in March and April was thanks to the weakening of the US dollar, as over 30% of the country's public debt is denominated in US dollars.

On the other hand, excellent results have been achieved in bringing down the fiscal deficit, which is seen as an important factor for further downsizing of the public debt.

Serbia’s consolidated budget deficit decreased 97.6% y/y in nominal and real terms in January-July, to RSD934.1mn (€7.59mn), from RSD39.1bn in January-July 2015, the latest ministry of finance monthly macroeconomic and fiscal data released on August 29 showed. In 2015, Serbia’s consolidated budget gap stood at RSD148.6bn and remained below the ceiling envisaged under the SBA. The country’s deficit was expected to reach RSD232.1bn, but the IMF decreased the target to RSD162.1bn in November 2015 after the third review of the SBA.

“The fiscal over-performance has continued in 2016, supported by strong revenue and tight control of current expenditures. The challenge is to sustain the fiscal adjustment to place the high public debt firmly on a downward path,” Zhang said. “The completion of the first phase of public sector rightsizing will help contain the public sector wage bill in 2016, and further optimisation will be guided by in-depth functional analysis. While the execution of capital expenditure has improved this year, measures are needed to strengthen the project appraisal process, enhance feasibility studies and risk analysis, and establish a single pipeline of public investment projects for the budget.”

The budget gap has been reduced also thanks to the approximately 10% cut of wages and salaries in the public sector since November 2014, agreed with the IMF before the SBA was approved. A year later, in November 2015, the IMF approved the Serbian government’s request to make a modest raise in public sector wages and pensions as of January 2016, but this did not negatively affect the budget.

However, according to the SBA, Serbia should cut employee numbers in public administration by 780,000 and in state-owned companies by 75,000 by February 2018. The government hopes the figures initially agreed with the IMF could be decreased, because there are other saving measures which would reduce public sector inefficiency. Also, aiming to prevent further growth in the jobless rate, the government is trying to attract foreign investments primarily in the industrial segment, which has already delivered some results.

“Decisive implementation of the identified structural reforms is essential for reducing fiscal risks and supporting competitiveness and growth. While there has been good progress, full implementation of state-owned enterprise restructuring and resolution plans is needed to avoid further increase of fiscal risks and to achieve the programme objectives,” the IMF official warned. 

Serbia has been trying to restructure around 500 public companies and has promised to stop financially supporting them, but the process faces numerous obstacles as it requires a significant reduction of jobs and thus increases the risk of the government losing popular support. Reforms to gas monopoly Srbijagas, power utility EPS and Serbian Railways are crucial for the success of the SBA and those are going slowly.

“Positive momentum in the financial sector reforms needs to be maintained by fully implementing the non-performing loans strategy. In addition, it is critical to implement the reform agenda of the state-owned financial institutions to reduce financial vulnerabilities and fiscal risks,” Zhang said.

The share of gross non-performing loans (NPLs) held by Serbian banks stood at 20.9% at the end of March, declining 0.7pp during the first quarter of the year, the National Bank of Serbia (NBS) announced in its latest quarterly banking sector report published on June 23. The decline followed a 0.4pp drop in the last three months of 2015.  

On August 13, 2015 the NBS adopted a strategy for resolving NPLs, in coordination with the World Bank, the European Bank for Reconstruction and Development (EBRD) and the IMF. The strategy aims to resolve the issue of NPLs on the market in a long term and sustainable way. Its goal is also to improve the mechanisms for resolving corporate debt through the court system. The NBS board adopted the Action Plan on August 17, 2015. 

GDP in Serbia increased by 2% y/y in the second quarter of 2016 after it increased by 3.5% y/y in the first quarter of 2016. Growth has been positive since Q2 2015. Previously, Serbia’s GDP contracted 1.8% y/y in the first quarter of 2015, which was a result of the devastating floods that hit the country in May 2014.

The IMF increased its projection for Serbia's 2016 economic growth to 2.5% on June 21. Back in April, the IMF revised its projection for Serbia’s economic growth in 2016 from 1.75% to 1.8% in its latest World Economic Outlook (WEO).


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