Delay in Serbia's new cabinet formation raises fiscal concerns - Fitch.

By bne IntelliNews June 4, 2012
Serbia should form a new government soon in order to implement fiscal consolidation, whose delay might put the country's rating under pressure in the coming months, ratings agency Fitch said in a statement. Last month's presidential and parliamentary elections have increased the uncertainty of the Balkan state's economic policy direction and relations with the IMF. Fitch warns that "the longer it takes to form a new government, the harsher the fiscal measures to rein in the 2012 deficit are likely to be." It added that the 4.25% fiscal deficit target set together with the IMF under this year's budget bill will most likely be missed. The ratings agency has recently raised its budget gap forecast for Serbia to 5.5% of GDP from an earlier revision of 5% of GDP made in March. "Further delay in the formation of a new government increases the likelihood that the 2012 fiscal deficit will overshoot our projection," Fitch said. It sees the economy stagnating in 2012 and therefore recommends that the new cabinet should seek consolidation on the spending side rather than on the revenue side. The agency also warned over Serbia's large exposure to the Greek banking sector, adding a new cabinet should be in place before the June 17 re-run elections in Greece, in case investor concerns increase to the point where a policy response is needed. A renewal of Serbia's EUR 1bn funding deal with the IMF would reduce the investor uncertainty but it is also awaiting the new government. Although a new IMF deal might take some time to be wrapped up, Fitch estimates that it will have a positive effect since it would serve as an anchor against excessive fiscal slippage and public debt hike. In November, Fitch affirmed its BB- rating on Serbia and stable outlook.

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