May 29 (Bloomberg) -- Serbia has no room for fiscal expansion and would be punished by financial markets if it loosened policy as it seeks to restart talks on its bailout loan, central bank Governor Dejan Soskic said.
The government to emerge from May 6 parliamentary elections must quickly trim the Balkan nation’s budget deficit after it hit 6 percent of gross domestic product in the first quarter, compared with a full-year goal of 4.25 percent, while public debt hit 46.7 percent of GDP, Soskic said in a phone interview in Belgrade yesterday.
“It’s about the real state of the economy” and fiscal expansion is not “feasible in the situation we are in,” he said. “If we don’t consolidate our finances, the punishment will come from markets, either through depreciation pressures on the dinar or through higher interest rates, the cost of which ultimately is paid by our taxpayers.”
The yield on five-year bonds jumped to 15.01 percent at an auction today as the government sold 520 million dinars of the debt, below its offer of 3 billion dinars.
Serbia’s sovereign spread, according to JP Morgan Chase & Co’s EMBIG index, has risen 79 points since May 3 to 569 points on May 25, and yields on its Eurobond maturing in 2021 rose by 40 basis points in the same period to 6.96 percent.
The elections were inconclusive with neither of the two biggest voter getters winning a majority. The deepening of the former Yugoslav republic’s stalemate pushed the dinar to record lows on concern a delay in forming a new administration will halt progress on spending cuts and the renewal of the country’s $1.3 billion international bailout loan. Delays will also affect Serbia’s path to the EU.
The election victory of Tomislav Nikolic, who will be sworn-in on May 31, “proved that the country’s political landscape had become more complex and that the EU needs to be involved in an intensive dialogue with Serbian authorities and all political leaders from the very first moment,” Miroslav Lajcak, the Slovak Foreign Minister and EU Foreign Policy Chief Catherine Ashton’s envoy, said in an article posted on euobserver.com.
The Western Balkan nation of 7.2 million people formally became a candidate for the EU membership on March 1, without any date for the start of entry talks. Lajcak said “this year could be a turning point in Serbia’s European history,” making it clear the next step hangs on Serbia’s relations with its former province of Kosovo, which declared independence in 2008.
The economy shrank 1.3 percent in the first quarter and the dinar has slipped 8 percent this year and traded at 116.27 to the euro today, its lowest in a decade. The Belgrade-based Narodna Banka Srbije has sold more than 1 billion euros ($1.25 billion) to slow the currency’s weakening since February.
The past four years have coincided with the global economic and European debt crises. The dinar has lost 30 percent, unemployment rose 10 percentage points, public debt increased 16 percentage points to 14.4 billion euros and the average take-home wage is 360 euros per month.
The new government needs to adopt fiscal consolidation measures as soon as possible, to pave the way for a revision of the loan program with the International Monetary Fund. The Washington-based lender froze the $1.3 billion precautionary loan deal in February, as it became clear that Serbia would slip on agreed fiscal targets.
The central bank kept its two-week repurchase rate at 9.5 percent on May 10, saying its monetary policy in the coming months will depend on the “pace and intensity” of the next government’s actions to control the budget.
“Fiscal expansion is not feasible because there’s no money for it and in order to do it,” Serbia will need to borrow even more money, moving if further from a fiscal rule that caps public debt to gross domestic product at 45 percent, Soskic said.
Serbia, which is struggling to head off a return to recession, has been without a government able to cut spending and create new jobs in an economy with unemployment at about 24 percent.
Former President Boris Tadic said yesterday he will start formal coalition talks to form a government even though his party came second in the May 6 vote. Tadic’s Democrats and the third-place Socialists, a party once governed by strongman Slobodan Milosevic, have agreed to an alliance that gives them 111 of parliament’s 250 seats.
Tadic said he wants to lead a government whose main task will be the “fight against unemployment and poverty and the war against corruption and crime,” while ensuring better standards of living by the end of its term.
The Fiscal Council, a three-member body appointed by parliament, will present its proposal for fiscal consolidation measures from 2012 to 2016 on May 30.
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