Serbian Dinar Could Weaken as Much as 6.95% in 2011, Erste Says

Serbia’s dinar may weaken as much as 6.95 percent next year depending on the development of factors such as foreign trade, the current-account deficit and new investments, Erste Group Bank AG said.

“The exchange-rate outlook is uncertain because weak foreign direct investment, lower private-sector indebtedness and the deterioration of the trade balance exert depreciation pressures,” Alen Kovac, an analyst for Erste, said. “For 2011, we forecast the exchange rate in a range of 110 to 115 dinars to the euro.”

The dinar was trading at 107.00-107.20 to the euro as of 1:48 p.m. in Belgrade, according to Bloomberg data, implying the currency could weaken between 2.7 percent and 6.95 percent under Erste’s estimates.

“The pressure is additionally heightened by risk perception and market expectations,” Kovac said in an e-mailed note today, adding that the National Bank of Serbia is expected to remain “susceptible to exchange-rate movements” in order to control depreciation pressures.

The dinar has lost nearly 11 percent since January, and about 40 percent since the start of the global financial crisis in 2008. This year alone the central bank has sold almost 2.5 billion euros ($3.32 billion) to curb the dinar losses amid a shortage of fresh private capital inflows.

The weaker dinar, along with higher food prices, has fuelled inflation in the second half of 2010, and the central bank has raised its benchmark interest rate since August by a total of 2.5 percentage points, to 10.5 percent, to make sure it meets its inflation target in 2011 after overshooting the 2010 target.

With the Narodna Banka Srbije committed to achieving its inflation target, Erste said more rate increases are likely “in December and another one in the first half of 2011,” bringing the Serbian two-week repurchase rate to as high as 13 percent. The bank holds its rate-setting meeting on Dec. 9 and the market expects the repo rate to be raised to 11 percent or 11.5 percent.

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