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Serbia’s Drcelic Sees Bond Yields Falling on Budget Cuts

Serbian debt yields will probably keep falling in 2013 as fiscal consolidation improves public finances, said Branko Drcelic, the head of the Serbian Debt Management Agency.

The Balkan nation expects a stable dinar and slowing inflation to help attract investors to its treasuries and bonds, Drcelic said in an interview yesterday in Belgrade.

The government seeks to narrow the budget gap to 3.6 percent of gross domestic product in 2013 from 6.7 percent of GDP this year, which may convince credit rating companies to raise Serbia’s rating, Drcelic said. It is rated BB- by both Fitch and Standard & Poor’s, three levels below investment grade, with a negative outlook.

“The domestic market liquidity is great, the dinar has firmed and stabilized and we have started the fiscal consolidation plan, the results of which will be fully visible in 2013,” Drcelic said. “The stronger dinar and stable inflation will help lower the cost of borrowing.”

Inflation fell to 11.9 percent in November and the central bank said it will rebound to about 13 percent in December. It is forecast to drop to between 2.5 percent and 5.5 percent by the end of 2013, according to the central bank.

Serbia is now paying 11.87 percent on 53-week dinar debt, compared with 14.59 percent on Sept. 5 and 5.05 percent on 18-month euro-denominated borrowing, down from 6.3 percent earlier this year, according to the agency. Yields have fallen to early-2012 levels since July, when Prime Minister Ivica Dacic’s Cabinet took office and trimmed spending to narrow the budget gap of more than 7 percent.

Reaping Benefits

“We are reaping the early benefits of all the fiscal consolidation measures taken in the past three months,” Drcelic said. “Liquidity in the local market is great and that’s reflected in an excellent bid-to-cover ratio in the past several auctions.”

Serbian borrowing costs have declined as investors seek higher yields amid near-zero interest rates in the U.S. and the euro area, while the Federal Reserve’s programs that pump money into the financial system through bond purchases have improved liquidity.

“We have secured sufficient funds to repay debts in the first five months of the year” and considering the good liquidity, “there is no need to rush” and we will “be waiting to seize the window of opportunity” for any major borrowing, he said.

Borrowing Needs

Serbia will borrow 525 billion dinars ($6.09 billion) next year to plug budget holes and repay debts. Half will come from domestic borrowing, $2 billion will come from new Eurobond sales and $1 billion in a loan from Russia to support the budget.

“Our main goal next year is to minimize the cost of borrowing because of discrepancy between what we pay abroad and in Serbia,” Drcelic said. Yields on the Serbian five-year Eurobonds stood at 4.417 percent at 11:35 a.m. in Belgrade, compared with 5.1 percent on Nov. 16. Its 10-year Eurobond yielded 5.135 percent, down from 7.837 percent on May 1, just five days before Serbia held general elections.


Finance Minister Mladjan Dinkic said on Oct. 31 Serbia would aim for a Eurobond sale next spring, after concluding a new loan deal with the International Monetary Fund.

Serbia sold Eurobonds in September and November, attracting investors from the U.S., U.K., Denmark, Germany, as well as buyers from Singapore and Hong Kong, Drcelic said. Foreign investors also hold around a third of the Serbian dinar-denominated debt.

The government will sell 100-million euros ($131.7 million) worth of 2-year bonds with a 4.875 percent coupon on Dec. 31, where yields dropped to 6.20 percent in an auction on July 24 from 6.25 percent in June.

The government plans to raise nearly $1.4 billion in the first quarter when repayments total $1 billion, including a debut sale of a seven-year dinar-denominated bond in March.

Dinar-denominated bonds will have a 10 percent coupon that’s “absolutely adequate” and in line with Serbia’s medium-term inflation target, Drcelic said.

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