Serbia Borrowing Costs May Rise More, Analysts Say

Serb borrowing costs, the highest in two weeks, may rise more should the International Monetary Fund continue to put a $1.3 billion lending program on hold, analysts at HSBC and Nomura said.

The yield on Serbia’s benchmark 2021 dollar bond has risen to 7.10 percent on Aug. 31 from 6.45 percent before May 6 general elections, lifting the premium over U.S. Treasuries to 583 basis points from 493, according to JPMorgan Chase & Co’s EMBIG index. The dinar has lost 5.5 percent against the euro in the same period, reaching its weakest on record on Aug. 10.

IMF officials are scheduled to meet Cabinet and central bank members beginning in mid-September to discuss a change in the central bank law that imposes parliamentary controls over the institution and measure progress on a pledge to cut debt and spending. Since elections that brought Ivica Dacic, a former ally of Slobodan Milosevic, who led the Balkan wars in the 1990s, to power, the dinar has been the fourth-worst performing currency of the 178 traced by Bloomberg worldwide.

Investors will be “monitoring closely the fiscal consolidation plans and whether they get the IMF’s stamp of approval,” said Agata Urbanska, and emerging-market economist at London-based HSBC Holdings Plc. “Otherwise, they will want to be paid for higher risk.”

Program Freeze

The IMF, which joined the World Bank and the European Union in criticizing the central bank amendment, has already frozen its lending program because of fiscal concerns and may withhold additional support and backing for its policies, forcing the government to look elsewhere for financing.

The government is considering a new Eurobond issue and is searching for as much as 2 billion euros ($2.5 billion) of “non-market” funding to pay public wages, pensions and welfare and repay creditors, he said on Aug. 8.

Jorgovanka Tabakovic, the vice president of the ruling Progressive Party, was appointed as the bank’s new governor on Aug. 6, after her predecessor quit in protest to the law change.

The IMF mission that will arrive in mid-September will also discuss fiscal slippages and will want to see Dacic’s deficit-cutting plans, it said on Aug. 24. The IMF won’t specifically discuss the suspended program, it said.

“The softening of the backstop in this way is very worrying, even if Serbia did not need to draw on funds,” Peter Attard Montalto, an emerging-market strategist at the London-based Nomura International Ltd. said in an Aug. 24 e-mail. Serbia will find it difficult to borrow, he said.

Sovereign Spread

Serbia’s sovereign spread, according to JP Morgan Chase & Co’s EMBIG index, stood at 576 basis points on Aug. 24, compared with 490 basis points in early May before general elections. Romania’s sovereign spread was 416.76 basis points.

The 10-year Eurobond yield rose to 7.026 percent on Aug. 24 from 6.908 percent on Aug. 1 when the ruling parties announced the plan to change the central bank law.

“All we have seen so far is a lack of buyers and hence Serbia externals have seen no rally in the same way others in the region have done,” Montalto said. “I don’t think they could issue here at all, really.”

Serbia’s economy is in its second recession in three years and it is forecast to contract by as much as 1 percent this year, according to the central bank. The fiscal gap expanded to 7.2 percent of gross domestic product, compared with a planned 4.25 percent, while the public debt reached 54.7 percent at the end of June exceeding a fiscal rule limit at 45 percent of GDP.

Inflation Pickup

Inflation is estimated to accelerate to 10 percent as the government raises taxes and increases regulated prices by the end of 2012, according to the central bank.

The current-account deficit widened to 14 percent of GDP at the end of June amid capital flight, turning the dinar into Europe’s worst performing currency of 174 currency worldwide tracked by Bloomberg.

Standard & Poor’s cut Serbia’s credit rating to BB- from BB on Aug. 7 and Fitch Ratings revised its outlook to negative on Aug. 16.

Serbia has kept the Eurobond plan open as Finance Minister Mladjan Dinkic seeks to reduce borrowing at home, where the government pays as much as 15 percent a year for dinar-denominated debt.

The government needs to repay 53.5 billion dinars ($570.68 million) worth of Treasury bills that mature in September and October of a total of 85.4 billion dinars maturing by the end of December, according to data compiled by Bloomberg.

Dinkic is preparing a supplementary 2012 budget and invited the IMF “to play a role” in drafting the 2013 budget.

“I think the political interference with the central bank is a shocking own goal,” Gabriel Sterne, senior economist at the London-based Exotix Ltd., said in an Aug. 21 e-mail. “It’s a significant backward step that politically-based changes were forced, I moved Serbia to a Sell as a result. Serbia has much to do to rebuild credibility.”

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