Serbia Faces Threat of Debt Crisis, Fiscal Council Says

Serbia faces the threat of a public debt crisis and needs to borrow an additional 2.5 billion euros ($3.1 billion) to finance its liabilities this year, the Balkan nation’s Fiscal Council said.

The deficit in the first five months of the year totaled about 80 billion dinars ($848 million), or between 7 percent and 8 percent of gross domestic product, the head of the Fiscal Council, Pavle Petrovic, told reporters in Belgrade today.

“As a result, we have had an increase in the current-account deficit, which has weighed on the dinar and this direction of the deficits and debt gives a clear sign to foreign investors who are financing this government that the situation is not sustainable,” he said.

Elections on May 6 were inconclusive with neither of the two biggest voter getters winning a majority. The former Yugoslav republic’s political 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.

The dinar weakened 0.66 percent today to 116.9638 per euro at 3:48 p.m. in Belgrade. The dinar has fallen 10.2 percent to the common currency this year, according to the Narodna Banka Srbije calculations.

Mixed Measures

The Fiscal Council, a three-member body monitoring the nation’s budget performance, proposed a mix of measures to cut spending and bolster revenue, including a 4 percentage point increase in the sales tax to 22 percent, a freeze in public wages and pensions and a cut in subsidies to avoid the crisis. The moves would cut spending by about 1 billion euros through the end of 2013, it said.

Serbia also needs to overhaul its pension system, raise the retirement age for women to at least 63 years from 60 years and cut at least 20,000 jobs, or 5 percent of the public-sector workforce.

Without those measures, “a public debt crisis is possible as soon as this year with uncontrolled dinar declines, a surge in inflation, the employment drop and a significant drop in living standards,” the council said in a statement, adding the fiscal gap would reach 6.2 percent of GDP at the end of 2012 and public debt would rise to 55 percent of GDP.

The fiscal consolidation program presented today is “comprehensive, necessary and urgent because Serbia’s fiscal situation is unsustainable,” said Zeljko Bogetic, the World Bank’s lead economist for the Balkans. “Picking some of the measures won’t yield results. Any responsible government must accept this program” in its entirety.

Budget Deficit

Serbia’s budget gap was 6 percent of GDP in the first quarter as economic activity contracted by 1.3 percent. That compares with a full-year goal of 4.25 percent of GDP originally set in the 2012 budget. Public debt reached 46.7 percent of GDP. According to Serbia’s fiscal rules, the budget gap is limited at 4.5 percent of GDP and the public debt ceiling is 45 percent of GDP.

With the proposed savings measures, which have been sent to President-elect Tomislav Nikolic and all parliamentary parties, the deficit may narrow to “around 5.5 percent of GDP” this year and to between “3 percent and 3.5 percent in 2013,” Petrovic said.

“The situation is very grave,” Petrovic said. The weaker dinar “reflects the unsustainable situation in public finances” and sticking with expansionary fiscal policies may lead Serbia to a rise in borrowing costs, he said.

Serbia’s sovereign spread, according to JP Morgan Chase & Co’s EMBIG index, has risen 81 points since May 3 to 572 points on May 29, and yields on its Eurobond maturing in 2021 rose by 45 basis points in the same period to 7.01 percent.

“Uncertainty will prevail until a new government is formed, but without fiscal consolidation the trend will be difficult to change and the dinar weakening may become even more drastic in the case of public debt crisis,” said Branko Urosevic, an adviser to the central bank’s chief economist’s office. “We are gradually approaching that crisis.”

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