Serbia Risks Downgrade on Deficits, S&P Analyst Says

Serbia risks a downgrade in its credit rating unless the government squeezes spending more, promotes export growth and secures a new agreement with the International Monetary Fund, a Standard & Poor’s analyst said.

The former Yugoslav republic has a “one-in-three” chance of earning a reduction at S&P, which rates Serbia BB- with a negative outlook, analyst Ana Jelenkovic said in a May 28 phone interview. Concerns about the budget deficit and current-account gap financing outweigh “positive pressures,” including the economy’s growth potential and European Union membership prospects, Jelenkovic said.

“The risks are more heavily weighted on the downside, and indicate a one-in-three chance of a downgrade over the next one to two years,” Jelenkovic said from London. A downgrade may come “in the event of significant deterioration in the fiscal and external balance sheets versus the previous year.”

Serbian Premier Ivica Dacic’s 11-month old Cabinet, awaiting a date next month for the start of EU membership talks, needs to cut spending by 2 percent of gross domestic product to put public finances on a more sustainable footing and avert the threat of a debt crisis.

The yield on Serbia’s 10-year Eurobond maturing in 2021 rose to 5.54 percent by 4:23 p.m. in Belgrade, the highest level since April 3, while the dinar traded at a five-week low of 111.4740 per euro, according to data compiled by Bloomberg.

Planned Deficit

Serbia has planned a fiscal gap of 3.6 percent of GDP, which may balloon to 8 percent of GDP this year if it leaves current policies unchanged, the IMF said on May 22, after concluding a two-week long review of the economy.

The Washington-based lender refrained from negotiating a new precautionary loan, which Serbia wants as proof to investors that the government’s policies are on track.

Though the Cabinet is unlikely to meet its deficit target this year, it’s expected to “make progress in cutting back the primary deficit,” Jelenkovic said.

“A deal with the IMF would help implement structural and fiscal reforms and stabilize the credit rating,” while “rebalancing toward a supply-driven economic model would support a stabilization of the ratings at the current level,” she said.

Serbian central bank Governor Jorgovanka Tabakovic, who is a member of the Serbian Progressive Party of former nationalists, told a group of Belgrade economics students on May 27 that credit ratings represent a “political means to force certain countries to implement unpopular measures” and put Serbia in a group of countries that include Angola, Suriname and Burkina Faso.

‘Difficult’ Growth

In the short-term, economic growth in Serbia and the region “will be difficult to achieve” because of the euro-area crisis, Jelenkovic said.

Serbia’s economy will grow 2 percent this year, the government estimates, after a 1.7 percent contraction in 2012 put the Balkan nation into its second recession in three years and pushed the unemployment rate over 23 percent.

S&P remains concerned about Serbia’s ability to finance the current-account deficit at a time when foreign direct investments are no longer sufficient to cover the gap and the government “assumes the role of external borrower,” Jelenkovic said.

The shortfall is projected to narrow to 8.5 percent of GDP from 10.7 percent last year, according to central bank estimates.

Political Questions

The ratings company will also be looking at the political situation in Serbia, its ties with the EU, the breakaway Kosovo province and other neighbors, as well as “policy effectiveness and the independence of institutions” when it reviews Serbia later this year, Jelenkovic said.

Serbia signed a landmark accord with Kosovo in April and agreed this week on what steps to implement, bolstering the country’s chance of getting a date for membership talks when the Council of the Europe meets on June 28, a day after a debate in Germany’s Bundestag in Berlin.

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

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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