Serbs May See Debt Rating Downgrade If Gaps Expand, S&P Says

Serbia’s sovereign debt ratings may be downgraded if deficits continue to widen and policy makers fail to implement measures to address public-sector inefficiencies, Standard and Poor’s said.

Serbia’s long-term and short-term foreign and local currency credit ratings remained unchanged at BB- and B, S&P said in a statement today. A “significant deterioration in the fiscal or external positions driven either by external shocks or domestic policy inaction” would create a potential for lower ratings, it said.

“The ratings on Serbia are constrained by our view of potential challenges in light of stubbornly high fiscal and external deficits,” S&P said. “Limited monetary flexibility” is also “a ratings weakness” because of the high share of euros in the economy and “a mixed track record of price stability.”

Prime Minister Ivica Dacic’s Cabinet, in office less than one year, has pledged to narrow the fiscal gap to 3.6 percent of gross domestic product this year from 6.7 percent in 2012, as well as curb price increases and restart growth. One out of four Serbs is jobless in an economy that shrank an estimated 1.7 percent last year.

Serbia’s planned fiscal consolidation for 2013-2015 may “shave off over 1 percent of GDP on average,” S&P said. “As a result, we believe medium-term growth drivers will be difficult to identify unless the government is more strenuous in its reforms to the labor market and public sector.”

IMF Loan

Serbia would would benefit from a new loan program with the International Monetary Fund as it could help “entrench fiscal and structural reforms” as well as contribute to dinar stability and growth prospects, “potentially leading the ratings to stabilize at the current level,” S&P said.

The IMF suspended a $1.3 billion precautionary loan with Serbia in February 2012 on evidence the previous government was slipping on deficit and debt targets. It told Serbia in November to cut debt without choking economic growth, citing an unsustainable fiscal gap, volatile inflation and unemployment.

Dacic wants to negotiate a precautionary loan program as it assures investors the IMF approves of the government’s policies even though the country doesn’t intend to draw on any of the funds. The IMF won’t discuss a new loan unless Serbia agrees on fiscal-policy adjustments including credible fiscal consolidation and structural reforms, the lender’s resident representative Bogdan Lissovolik said on March 14.

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