Serbia sold a fifth of the bonds it offered as the government met to endorse a fiscal plan aimed at enforcing cost cuts to narrow the budget gap, weakening investor demand.
The government sold 1.9 billion dinars ($21.7 million) in three-year debt of 10 billion dinars or $115 million on offer, the Debt Management Agency in Belgrade said in an e-mail today. The average yield on the 10 percent coupon bond rose to 10.5 percent from 10.49 percent at an April 23 auction. Investors bid for 2.4 billion dinars of the debt.
The government “unanimously” adopted the revised 2013 budget as “part of comprehensive economic reforms” designed to stabilize the budget, overhaul the public sector and improve business climate, its press office said in an e-mail today. The measures to trim administrative costs and sell unprofitable companies, while avoiding cuts in public wages and pensions, will lead to savings of 36 billion dinars.
The 11-month old government of Prime Minister Ivica Dacic left the budget deficit at 6 percent of gross domestic product in the first quarter, stoking investor concern over fiscal discipline. European Union leaders decide on June 28 whether to set a date for the beginning of membership talks for the country after its efforts to normalize ties with its breakaway Kosovo province.
Foreign investor demand could weaken today “due to increased global markets’ volatility and Serbian fiscal slippage feeding into rating downgrade risks,” analysts including Hrvoje Stojic at Hypo Alpe-Adria Bank d.d. in Zagreb said before the auction in a note to clients on June 24.
Prospects that the U.S. Federal Reserve will gradually end bond purchases by mid-2014 reduced the relative attractiveness of developing-nation assets, triggering a sell-off in global markets. Yields on Serbian 10-year Eurobonds maturing in 2021 fell 20 basis points to 7.26 percent as of 2:59 p.m. in Belgrade, snapping a four-day increase of 128 basis points to a record high 7.47 percent yesterday.
Serbian bond yields “have been hit considerably more than most of its rating peers” Gabriel Sterne, the emerging markets economist at Exotix Holdings Ltd. in London, said in an e-mail. “Spreads on 21s have increased by 150bps more than similarly rated Uruguay” and “current market conditions are probably of the type that are looking to punish those who fell short on correcting imbalances in the previous benign conditions, and now look more vulnerable in much more difficult conditions.”
The dinar traded at 114.5050 to the euro at 2:59 p.m. in Belgrade, or 0.05 percent weaker on the day, according to data compiled by Bloomberg. The main stock market index of 15 most actively traded assets, Belex 15, closed 1.71 percent down on the day at 481.64 points.
The government plan raises the 2013 budget gap to 178.3 billion dinars, or 4.7 percent of gross domestic product, from a previously planned 122 billion dinars, according to today’s statement. Serbia risks a downgrade in its credit rating unless the government squeezes spending more, promotes export growth and secures a new agreement with the International Monetary Fund, Standard & Poor’s said in May.
The nation’s fiscal gap may balloon to 8 percent of GDP this year if the government leaves policies unchanged, the IMF said on May 22. The lender refrained from negotiating a new precautionary loan, which Serbia wants as proof to investors that the government’s policies are on track. Standard & Poor’s rates Serbia BB-, or three levels below investment grade, with a negative outlook.