• Rating affirmed at B+, four steps below investment grade
  • Fiscal consolidation plan seen shrinking budget deficit

The outlook on Serbia’s junk credit grade was raised to positive from stable by Fitch Ratings, which cited a narrower budget deficit and a stronger economic recovery.

Fitch affirmed the Balkan nation’s long-term rating at B+, four steps below investment grade and on par with Armenia, Cyprus and Kenya. Serbia is rated at the same level by Moody’s Investors Service, and one step higher, at BB-, by Standard & Poor’s.

“The budget deficit is likely to come in well below the target of 6.3 percent of GDP set at the start of the year,” Fitch said in a statement Friday. “The economy is slowly recovering.”

The economy is now expected to expand 0.7 percent in 2015, compared with a previous estimate for no growth, and 1.7% in 2016, driven by a pickup in investment and a recovery in mining and energy following floods in May 2014, Fitch said.

The biggest former Yugoslav republic, which is targeting European Union membership by 2020, is trying to repair an economy that’s contracted three times since 2009. Prime Minister Aleksandar Vucic reached a three-year accord with the International Monetary Fund in February to stabilize public finances and unlock growth. He must still tackle issues including unprofitable state companies and bad loans at banks.

“Serbia is currently in a way the most politically stable country in the Balkans, but the paradox is that at the same time it’s got the worst economic performance,” Laza Kekic, director of country forecasts at the Economist Intelligence Unit in London, told a conference Thursday in Belgrade. “It remains to be seen how sustainable this gap between political stability and bad economic performance can last.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE