Serbia’s borrowing costs climbed to the highest since February 2011 after the government in its first auction since the Socialist Party of Slobodan Milosevic asked to form a government and as the country faces its biggest month of debt redemptions this year.
The former Yugoslav republic raised 6.87 billion dinars in the sale of 53-week notes, less than the maximum target of 18 billion dinars, according to the debt-selling agency. The yield was 14.25, up from 13.49 percent at the previous sale of similar debt on June 20.
The dinar declined 0.35 percent against the euro to trade at 115.2966 to the euro at 2:48 p.m. in Belgrade according to data compiled by Bloomberg, while BELEX15, the main index of 15 most actively traded assets on the Belgrade bourse, declined 0.35 percent on the day to 428.75 points, its lowest close in three years.
Socialist Party leader Ivica Dacic offered to form a government to end eight weeks of political stalemate, President Tomislav Nikolic said June 28. The Socialists are set to take power by the end of July for the first time since party founder Milosevic, blamed for fomenting the 1990s Balkan Civil wars that destroyed the local economy, was ousted. International lenders have urged the candidate for European Union entry not to veer from austerity measures as Europe’s debt crisis threatens to push Serbia back into recession.
“We need to see a change in fundamentals and stabilization in political terms,” said Viktor Szabo, who helps oversee $8 billion in emerging-market debt at Aberdeen Asset Management in London and doesn’t plan to take part in the auction. “Without a government, without the security of the International Monetary Fund and with the European crisis having an impact, Serbia is not the best investment opportunity.”
Dacic, Milosevic’s former spokesman whose Socialist Party came in third place in May 6 general elections, was given the chance to build a coalition. The top two vote-getters, the Progressive Party and former President Boris Tadic’s Democrats, remained locked in a power stalemate.
Nikolic, the former head of the Progressive Party, won presidential elections last month after vowing to defy the EU and the U.S. with its claims on Kosovo and promising to move the former communist nation closer to Russia.
Dacic is in talks with the Progressive Party and the allied United Regions of Serbia to form a three-party government, and “coalition talks are going in the right direction,” his senior party official and head of the Srbijagas gas monopoly Dusan Bajatovic said today.
“This week will be a watershed for our public finances,” said Ivan Nikolic, an analyst at the Belgrade-based Economics Institute, in a July 2 phone interview. “If these two auctions fail, we really are on the verge of bankruptcy.”
Vladimir Vuckovic, a member of the country’s Fiscal Council, said today that the country needs to raise between 2.5 billion euros ($3.15 billion) and 3 billion euros by the end of the year to finance the budget and service debts. Serbia needs to repay 900 million euros worth of debts through September.
“Our state needs a lot of money in the short period of time and it is clear that we increasingly depend on those weekly even daily cash inflows,” Vuckovic said.
About 34.7 billion dinars of debt comes due in July, the biggest month for repayments in 2012, according to Jasna Atanasijevic, chief economist at the Belgrade-based Hypo Alpe Adria AD, citing Finance Ministry data.
Outgoing Premier Mirko Cvetkovic said today the 2012 budget gap will be exceeded by as much as 350 million euros, less than 500 million euros to 600 million euros what economists have estimated.
Richard Segal, the director of the emerging-markets group at the London-based Jefferies International Ltd., said the coalition led by Dacic, a colleague of Milosevic in the 1990s, will be “the one of convenience” that allows the country to avoid another round of campaigning and new elections.
The country’s two larger political parties are under increasing pressure by the U.S., which is sending an envoy to Belgrade to foster a compromise that would block Dacic from taking over the government, according to Belgrade newspaper Blic on July, citing unidentified officials.
U.S. Deputy Assistant Secretary Philip Reeker is visiting Serbia from July 3 to July 5 as a part of regular visits to the region, while Assistant Secretary Philip Gordon will be in the Serbian capital on July 8 and July 9 after attending a Croatian economic conference in Dubrovnik, the U.S. Embassy in Belgrade said. Embassy officials had no comment on the Blic report.
The U.S. and the EU have been prodding Serbia to reach a peaceful compromise with Kosovo, the breakaway province that unilaterally declared independence in 2008 and has been recognized by the U.S. and 22 of 27 EU states.
The government that emerges from coalition talks will have to tackle the faltering economy and cut the budget deficit before offering any incentives for growth to businesses, said Milojko Arsic, a central bank board member and the chief macroeconomist at the Belgrade-based FREN economic research center.
Meanwhile, to try to attract investors back to the Balkan country, the government should try direct striking deals with foreign lenders on offered rates, use state deposits for bridge financing, shorten maturities and “borrow as little as possible, to bide time until striking a new IMF loan deal,” Arsic said in a July 2 phone interview.
Serbia’s $1.3 billion precautionary loan program with the IMF was suspended in February, following evidence that the government would slip on all fiscal targets.
Aleksandar Vlahovic, the chairman of the Serbian Association of Economists, said the government needs “drastic spending cuts” and a boost in revenue with measures such as a two- to three-percentage-point increase in the value-added tax and improved tax collection.
“An alternative to those measures will be the depreciation of the dinar, resulting in inflation,” Vlahovic said in a June 26 phone interview.
‘Too High for Comfort’
Serbia is struggling with high public debt, which is “becoming much too high for comfort and this comes primarily from the fact that the fiscal deficit remains too high and needs to be brought down,” Loup Brefort, the World Bank’s resident representative told a business forum in Belgrade today. Public debt rose to 52.1 percent of GDP in April while the fiscal deficit reached 7.3 percent at the end of March.
For the time being, Serbian illiquid 2021 Eurobonds “continue to levitate,” Jefferies International’s Segal said.
Bond prices and yields, which may “remain stagnant” during Cabinet talks, may continue to deteriorate once fiscal and economic policies by the new government are released.
Dinkic’s Regions of Serbia, which wants control of the Finance and Economy Ministries, prepared an economic program that calls for “urgent measures” to reduce the budget deficit to around 4 percent and 5 percent of gross domestic product in 2013 and below 3 percent of GDP in the following years.