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Serbian One-Time Spending to Boost 2014 Deficit to 7.1% of GDP

Serb government one-time spending to reorganize state enterprises and prop up the commercial banking industry, as calculated by the International Monetary Fund, will boost the 2014 deficit to 7.1 percent of economic output.

Next year’s shortfall compares with a planned 6.5 percent of gross domestic product in 2013 and includes non-budgeted financial transactions equivalent to 1.7 percent of GDP, the Finance Ministry said today on its website in Belgrade. One-time, non-budgeted spending will stay within 0.9 percent of GDP in 2015 and 2016, it said.

The widening gap includes “one-time spending liabilities assumed in previous years, expenditures related to the completion of the restructuring process of state-owned companies and spending to establish the stability of the financial sector,” the ministry said .

Prime Minister Ivica Dacic, who shuffled his cabinet in September, has pledged to raise taxes, push back the retirement age for women, crack down on the shadow economy and cut subsidies to state-owned companies to halt an increase in public debt by 2016.

Serbia sets different deficit targets, a narrow one for the central government and a broader to include local governments. The central government’s shortfall for this year is set at 4.6 percent of GDP, down from 4.7 percent in 2013.

Public debt will rise to 67.2 percent of GDP in 2014, 69.8 percent in 2015, and 69.7 percent in 2016, before falling to the legal cap of 45 percent of GDP in 2025, the ministry said.

Budget-Cutting Plans

Yields on Serbia’s Eurobonds maturing in 2021 rose 1 basis point, or 0.01 percentage point, to 6.60 percent at 2:59 p.m. in Belgrade, data compiled by Bloomberg show. Investors demanded 424 basis points, or 4.24 percentage points, of extra yield to hold Serbian dollar bonds instead of Treasuries on Nov. 1, according to indexes by JPMorgan Chase & Co.

Finance Minister Lazar Krstic pledged to trim the budget shortfall by 1.6 billion euros ($2.16 billion) by 2016 after the deficit reaches 7.5 percent of GDP this year, according to an IMF forecast on Oct. 8, lower than an earlier 8.3 percent outlook.

The general government deficit will narrow to 5.2 percent of GDP in 2015 and 3.2 percent of GDP in 2016, according to the three-year Fiscal Strategy the government adopted on Nov. 1. The government plans to balance the budget by 2022.

The economy, still reeling from a second recession in three years, will grow 1 percent in 2014, with growth picking up to 1.8 percent in 2015 and 2 percent in 2016.

Precautionary Loan

Serbia wants to reassure investors it can rein in the fiscal gap and the cabinet is trying to secure a precautionary credit line from the IMF, which refused loan talks in May when Serbia already fell short of its budget commitments.

The government may sell a $1 billion Eurobond before the end of 2013, in line with its revised 2013 budget, and tap markets with a smaller issue next year, according to the draft 2014 budget posted on the Finance Ministry’s website.

Next year’s borrowing plan includes 68.5 billion dinars ($810 million) from Eurobond sales, 264 billion dinars of loans from local and international financial institutions and governments and 330 billion dinars in domestic debt sales.

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