Serbia Lowers GDP Growth Forecast Through 2012 on Crisis

Serbia’s economy will expand slower than previously forecast through next year because of concern Europe’s sovereign-debt crisis will hinder investment and trade, central bank Governor Dejan Soskic said.

The bank lowered this year’s growth forecast to 2 percent from 2.5 percent, while gross domestic product will grow 1.5 percent next year, compared with an earlier prediction of 3 percent, Soskic told reporters in Belgrade today.

The National Bank of Serbia is fighting the effects of the euro region’s fiscal and debt troubles by slashing the benchmark interest rate three-quarters of a point to 10 percent on Nov. 10 to keep the economy from slipping into recession.

Policy makers are monitoring “trade channels and financing channels” to gauge the potential impact of the crisis, Soskic said.

The economy expanded 0.7 percent in the third quarter, according to a flash estimate, down from 2.4 percent in the previous three-month period. The revision takes into account slowdowns in the country’s “big trading partners, especially Italy, Germany and Romania,” Soskic said.

Deteriorating growth prospects will also result in a “somewhat higher” current-account deficit of around 7.5 percent of GDP in 2011, Soskic said.

The shortfall widened 3.5 percent in the first eight months to 1.7 billion euros ($2.36 billion), compared with the year- earlier period.

The International Monetary Fund forecast this year’s current-account gap will be 7.6 percent of GDP, widening to 8.8 percent in 2012 and returning to 8.3 percent in 2013.

Slowing Credit

Soskic said the weaker growth is also reflected in banks’ credit activity, which “has continued to slow down,” with September credit growth reported at 10.8 percent. Non-performing loans rose to 18.8 percent from 18.6 percent of the total credit portfolio at the end of June.

Banks in Serbia remain well-capitalized, liquid and solvent, Soskic said, adding that the risk of foreign banks pulling capital out of Serbia is “not imminent” because “all the key indicators are positive and encouraging.”

The central bank will stick with the plan to introduce Basel II rules as of end-2011, Soskic said.

“We are carefully analyzing all possible consequences on capital levels and we do not want the transition to Basel II to create any imbalances in terms of capital adequacy, liquidity and solvency,” he said.

The IMF said in October that the move to Basel II rules, which govern European banks, should be “a priority to further strengthen” the bank regulatory framework and “adopt internationally accepted approaches.”

Serbia will maintain its capital adequacy ratio of 12 percent and will introduce a capital-conservation buffer of 2.5 percent to keep banks with a capital-adequacy ratio below 14.5 percent from distributing profits, Serbia said in its letter to the IMF last month.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: Alan Crosby at acrosby1@bloomberg.net

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