May 14 (Bloomberg) -- Serbian economic growth will slow next year because of the Ukrainian crisis, declining exports and the government’s efforts to curb the budget deficit and public debt.
Growth will fall below the National Bank of Serbia’s February forecast of 2 percent as car, agriculture and crude oil product exports will slow, the Belgrade-based bank said in its quarterly inflation report today. The economy will expand 1 percent this year, after 2.5 percent gain in 2013.
“We will wait to see how things develop, considering that one of the biggest foreign investments, the South Stream, has been slow to materialize because of the geopolitical crisis and developments in Ukraine,” central bank Governor Jorgovanka Tabakovic said at a briefing in Belgrade.
Prime Minister Aleksandar Vucic, whose government took office on April 27, needs to adopt a series of measures to rein in public spending and narrow the deficit, helping the central bank reassess growth, Tabakovic said.
The European Bank for Reconstruction and Development sees GDP growth at 1 percent this year and next, the slowest among Balkan nations because of likely “significant spending cuts” and “important trade and investment links with Russia,” it said.
The planned austerity is the key to convince the International Monetary Fund to support the biggest former Yugoslav republic with a new program.
“We expect them to already come at the end of May so we can continue talks, but it depends on the government when the IMF actually comes to accelerate talks on the new deal,” Tabakovic said. The IMF may want to wait until after the laws are passed in late June, she said.
The government’s consolidated fiscal gap amounted to 7.7 percent of GDP in the first quarter, with 4 percentage points resulting from interest-rate repayments, the governor said. A deal with the IMF would serve as an “additional guarantee to investors that Serbia is pursuing responsible and sustainable economic policy,” Tabakovic said.
There are “no more excuses for Serbia,” Tim Ash, an emerging-markets economist at Standard Bank Plc in London, said in an e-mail. “This will be a key test of whether they are really serious about reform, i.e. whether they sign up on the dotted line to a new program” and “I will turn much less constructive on this credit if they baulk yet again.”
The yield on Serbian Eurobonds, maturing in 2021, fell 3 basis points, or 0.03 percentage point, to 4.778 percent by 1:44 p.m. in Belgrade, falling for the 13th straight day to the lowest level in a year, data compiled by Bloomberg show.
The Narodna Banka Srbije cut its benchmark interest rate by half a percentage point to 9 percent on May 8. It will monitor the Ukrainian crisis’s effect on the country’s risk premium and commodity prices as well as the results of budget cuts and “structural reforms” to gauge the pace of further cuts, she said.
Weak domestic demand will rein in imports, which will help narrow the current-account deficit to “below 4 percent” of economic output this year. The gap, traditionally above 10 percent of gross domestic product, almost halved last year to 5 percent of GDP.
Inflation will stay close to the lower end of the target band of 2.5 percent to 5.5 percent through June, gradually picking up in the second half of 2014. Bank lending shrank 3.4 percent in the first three months of the year as bad loans rose to 22.2 percent from 20.7 percent in December, the bank said.
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