Belgrade unveils measures aimed at fixing Serbia's finances

By bne IntelliNews October 8, 2013

Nicholas Watson in Prague -

The Serbian government on October 8 unveiled a series of painful reforms designed to fix the country's finances, which include raising taxes and the retirement age for women, cracking down on the grey economy, and cutting subsidies to state-owned companies.

The package of measures had been well trailed by the coalition government, with powerful Deputy Prime Minister Aleksandar Vucic particularly strident in his claim the country could face bankruptcy if urgent steps aren't taken to cut public spending. Such comment was widely dismissed as alarmist by analysts, who suggested they were rather a way of "softening up" the public ahead of painful cuts. However, there are clearly stubborn and persistent problems in the Serbian economy that the measures target.

At an open cabinet session, Prime Minister Ivica Dacic strained against his visceral socialist leanings to announce fiscal consolidation measures that aim to improve the budget by €1.5bn over the next three years, and cut the deficit to 2-3% of GDP by 2017. That's no small ambition given the gap for the current year is likely to reach as high as 6.5%, according to government estimates.

Starting next year, the government plans to increase the lower VAT rate from 8% to 10%, while the retirement age for women will rise to 63 by 2020, from the current 60. Men will still leave work at 65. Taxes on public servants making RSD60,000 (€525) or more a month will also rise, while a "solidarity tax" hike of 25% will be imposed on those earning more than RSD100,000.

With 179 state-owned enterprises (SOE) already set either to go on the block or close in 2014, they will also face an overhaul in a bid to save €300m-400m. Meanwhile, Belgrade hopes that a crackdown on the grey economy, including the black markets in tobacco and oil derivatives, should uncover another €150m a year.

"Our commitment is vital also for the sake of creditors," Finance Minister Lazar Krstic said, according to Bloomberg. "We are talking about fiscal consolidation of around 4.5% to 5.0% of GDP through 2017, which is more than €1.5bn in savings over the next four years."

Certainly, Serbia's finances are in a pickle, and need to be addressed sooner rather then later. At 65% of GDP, the country's debt levels are low by Western European standards, but they're headed in the wrong direction; four year ago that figure stood around 40%. As of the end of July, the budget deficit was already equivalent to 3.5% of estimated full-year GDP, making the target of 4.7% for the year look challenging. In May, the IMF warned that without additional budget consolidation measures, the 2013 gap could spike as high as 8.0%.

Serbia's economic and fiscal policies over the past ten years have been "irresponsible and lacked transparency," Krstic, a recent appointment to the cabinet, told the government session. "The problem was not that Serbia's debt was growing, as all countries increase their debt in times of crisis," he noted, "but that the funds were used to cover current expenses, while there were not enough brave moves necessary for economic recovery."


Such trends prompted Deputy PM Vucic - whose Serbian Progressive Party is the largest in the coalition - to warn on October 7 that, "the state is almost bankrupt". Speaking to Serbian TV, Vucic said: "Measures for economic recovery will be difficult, not populist, and will affect between 300,000 and 500,000 people."

Many took issue with the rhetoric. "While Serbia's finances are, indeed, in dire straits, Deputy Prime Minister Aleksandar Vucic's ... statement on almost imminent bankruptcy is aimed at the domestic audience as he strives to limit resistance to forthcoming painful reforms," says Otilia Dhand, of Teneo Intelligence. "The government decided to tackle the budget deficit by cutting expenditures of Serbia's oversized bureaucracy and SOEs. This will likely mean across-the-board wage cuts as well as redundancies due to the restructuring of state owned enterprises. Widespread protests and systemic resistance present a risk to the implementation of the intended reforms, and Vucic's statement is to be understood as an attempt to mitigate it."

Indeed, Krstic affirmed that the government has enough cash - around $1.2bn - to finance itself through to the end of the year. Economists estimate Serbia has around $1.7bn of funding needs left for the year. Vucic said on October 7 that Serbia expects to receive a low-interest loan of $1bn from the United Arab Emirates (UAE), whose crown prince, Sheikh Mohammed bin Zayed Al Nahyan, the deputy PM has been assiduously courting. With further loans, Vucic said the total from the UAE could reach $2bn-3bn by the end of 2014.

Serbia said in September it is also looking to raise about $1bn from an international bond - a sale the finance ministry will find harder in the wake of the bankruptcy comments, as well equally injudicious remarks from Vucic about the possibility of rating downgrades in the near term. "Of all the comments from Vucic... this is the most inexplicable and damaging," says Tim Ash of Standard Bank. "With the sovereign set to come ... to market over the next few weeks, it is difficult to understand why he would make such comments - unless the rating agencies had already given the nod."

Just back from a trip to Serbia, the analyst worries that the rhetoric risks becoming a self-fulfilling prophesy. "We did not sense from our meetings last week in Belgrade that ratings downgrades were that imminent," Ash writes, "but if Vucic continues to talk in this fashion, they will be!"

However, the International Monetary Fund (IMF), with whom Serbia is trying to arrange a new stand-by loan, is doing its bit to help Belgrade out of the hole its dug itself. Ahead of the government's announcement of the reforms, an official from the international institution told Reuters the IMF is "ready to support [the Serb government] in any way that suits." James Roaf, the IMF representative for Central and Eastern Europe, said: "If they want advice we can provide advice; if they want a financial arrangement we can work with them to do that."

Serbia knows that securing a deal with the IMF is crucial to giving investors confidence in the country, which has huge potential but a dodgy past. The IMF froze the previous €1bn deal in 2012 because the previous Democratic Party government couldn't stick to commitments that the budget deficit in 2012 should not exceed 4.25% of GDP, and that public debt should remain below 45%.

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