Serbia Extends Rate Halt as Selling Pressure Mounts on Dinar

  • Central bank used about 2% of reserves to aid dinar over month
  • Serbia vulnerable to risks over external financing conditions

Serbia’s central bank left borrowing costs unchanged for the third consecutive month to take the pressure off the dinar after it was forced to increase interventions to support the currency.

The National Bank of Serbia kept its one-week repurchase rate at 4.5 percent on Tuesday, according to a statement on its website. Twenty-two of 23 economists surveyed by Bloomberg forecast no change and one saw a quarter-point reduction.

“Considering that uncertainty in terms of inflation primarily stems from the global environment, the degree of expansiveness of the monetary policy of the National Bank of Serbia will depend first of all on the assessment of the inflationary impact from developments in global commodity and financial market,” the central bank said.

Financial market turmoil and a slowdown in China have rippled across developing Europe, complicating Serbian policy makers’ efforts to rev up inflation that’s remained below their target range since February 2014. The central bank, which cut the key rate to a record in 2015, has spent about 2 percent of its reserves in the past month to support the dinar, with Governor Jorgovanka Tabakovicblaming growing demand for energy and the repatriation of dividends for its decline.

The dinar traded 0.2 percent weaker at 122.33 at 5:15 p.m. in Belgrade, according to data compiled by Bloomberg. The currency is down 0.5 percent this year. The yield on Serbia’s dollar bonds maturing in 2021, rose five basis points to 4.697 percent.

Tabakovic, a close ally of Prime Minister Aleksandar Vucic, has looked to lower lending costs as the government tries to spur economic growth and create new jobs following three recessions since 2009. Global political events and the pace of rate increases by the U.S. Federal Reserve will determine the path of Serbian monetary easing, Tabakovic said Dec. 22. The central bank cut its benchmark by a cumulative 350 basis points last year.

“Currency stability, rather than low inflation, remains the main focus of the central bank,” Dan Bucsa, a London-based economist at UniCredit Bank AG, said in a note to clients. Serbia’s failed privatization of Telekom Srbija AD may complicate external financing, and “since most foreign investors in Serbian bonds are USD-based, expected Fed hikes may affect Serbian asset prices. As a result, we do not expect any rate cuts for the rest of the year.”

U.S., ECB

The pace and size of rate increases in the U.S. “will dictate developments in global commodity and financial markets and capital flows to emerging countries to the greatest degree” possible, Serbian policy makers said in the statement. The European Central Bank’s monetary easing will be offsetting the impact of higher U.S. borrowing costs, while price pressures in Serbia will stay benign in the coming months, thanks to cheap oil, slow global inflation, tight fiscal policy and subdued demand, the central bank said.

With Serbia’s financing needs topping 16 percent of economic output in 2016, Serbia has to contend with risks on external markets. The government may need to quickly receive another loan from the United Arab Emirates in the first quarter to “avoid further pressure on the currency,” Bucsa said. Serbia has relied on funding from foreign investors including the U.A.E. for major infrastructure projects and budget financing.

“Better risk appetite and U.A.E money may stabilize the dinar, but Serbia will need foreign investors to buy at least 45 percent of domestic bond issuance in order to avoid a depletion of FX reserves this year,” he said.

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