Moody's Investors Service said on Aug 26 that Serbia needs to reduce its fiscal deficit and debt level, or achieve a sustainable acceleration in its economic growth in order to reduce existing macroeconomic imbalances and improve its rating outlook.

Moody’s has rated Serbia's government bond at B1, considering the government's relatively high fiscal deficits and rising debt burden, as well as the economy's uncertain growth prospects amid the lasting eurozone recession.

Serbia’s rating on the other hand also incorporates the institutional and economic benefits that the country will amass along its EU accession path, the rating agency said in report issued as a market update that does not contain a rating action.

The sovereign rating has a stable outlook. Persistent high fiscal deficits and rising debt to economically unsustainable levels, as well as a slowdown or disruption on Serbia’s EU path could put downward pressure on its rating, Moody's says.

The agency notes that Serbia's general government fiscal gap leaped to 6.4%/GDP in 2012 from 2.6%/GDP in 2008, while government debt jumped to 59%/GDP from 33.4% over the same period - it is expected to rise to 63%/GDP this year.

Moody’s said in the statement that the government’s debt-servicing costs are vulnerable to exchange-rate fluctuations since a large portion of the debt is either denominated or indexed to foreign currencies.

“Moreover, in contrast to its historical reliance on multilateral and bilateral debt, over the last few years the government has turned to the international bond market for its deficit-financing needs. Consequently, its public finances are increasingly vulnerable to international market volatility and interest-rate trends as well,” the statement added.

As far as Serbia’s economic growth outlook is concerned, Moody’s sees the GDP rising between 1.5% and 2.5% in 2013-2014 after contracting 1.7% in 2012. The two-year forecast, however, is lower compared to the median growth rate for similarly rated peers, the rating agency said. It noted the Serbian economy has cooled significantly from the average growth of 5% in the five years prior to the crisis to an average of just 0.3% in the past three years, feeling the effects of the euro area trade and investment uncertainties.

Moody’s also said Serbia’s rating reflects as well it s wide current account deficit, high inflation and unemployment and rising external debt. On other hand, it noted that the country’s survey indicators of governance have improved over the last few years, its per capita income levels are relatively high compared to similarly rated peers, as are the infrastructure and labor force education levels.