S&P affirms Serbia's ratings at BB-/B, keeps outlook negative

By bne IntelliNews April 11, 2014

Standard & Poor's affirmed on April 11 Serbia's BB-/B long- and short-term sovereign credit ratings and kept the outlook negative as the country continues to face high fiscal and external deficits which expose it to refinancing risks. The ratings are also constrained by Serbia’s moderate GDP per capita and limited monetary policy flexibility due to the high level of euroization of the economy, S&P said in a statement.

On the other hand, the ratings are supported by Serbia’s long-term economic growth potential. The latter, however, could only be unlocked with reforms in the labour market, the business environment and public administration, S&P noted.

According to S&P, the landslide victory of ​Serbia Progressive Party (SNP) in the March early parliamentary elections creates a more favourable political environment for the launch of key structural and fiscal reforms.  The new cabinet, to be headed by the leader of the SNP – Aleksandar Vucic - is expected to gradually reduce the persistently high headline deficits. Nonetheless, the general government deficit should increase to 6.9% of GDP in 2014 as most of the planned reforms will start yielding results next year. S&P sees the average deficit slightly above 4% of GDP in the 2015-2017 period

The net general government debt will reach 51% of GDP in 2014, up from 25% in 2009, S&P added. Interest expenditure are also forecast increasing to an average of more than 7% of consolidated general government revenue in 2014-2017, from less than 2% in 2009.

Serbia’s export-led growth will soften in 2014 as budget austerity and high unemployment at close to 25% will remain a drag on consumption. In addition, export growth will moderate reflecting a high prior-year base, S&P said. Investment activity will remain well below the 2007 and 2008 peaks. Inflation is projected to remain moderate and close to the upper bound of the central bank’ target tolerance band of 2.5% to 5.5% in the 2014-2015 period.

The current account deficit narrowed significantly from over 10% of GDP in 2012 to just below 5% of GDP in 2013 on stronger exports of the automobile and agricultural sectors and stagnating imports due to subdued domestic demand. It is forecast to widen slightly to an average of 6% of GDP in the 2014-2017 period, the rating agency underscored. 

S&P said it could downgrade Serbia in the next 12 months if the government fails to implement the policies that would stabilise and ease the debt burden and if external financing becomes more costly. At the same time, the ratings could stabilise at the current levels if the reforms implementation is successful and leads to a sustainable public finances consolidation, resulting in stronger economic prospects and sustainable external position over the medium-term.

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