Serb Yields Rise as Global Risk, Fiscal Concern Keep Buyers Away

Yields on Serbian domestic bonds rose as the government sold less debt than planned after foreign investors shied away from the market and local buyers weighed fiscal and political risks.

The government sold 3.3 billion dinars ($38.03 million) in 2-year Treasury bonds of 10 billion on offer, with yields on the 10-percent coupon note rising to 10.48 percent from 9.89 percent at a May 14 auction of the same maturity debt, the Debt Management Agency said in an e-mail today. Custody clients, through which foreign investors take part in Serbian auctions, were absent from the sale today, according to auction results.

The sale today was the first after the European Union said on June 28 it would open talks with Serbia on its future membership in January at the latest, conditional on the Balkan nation’s reconciliation with its breakaway Kosovo province. Emerging-market bonds and stocks tumbled last month after U.S. Federal Reserve Chairman Ben S. Bernanke said the central bank may start to curb stimulus.

“Foreign investors are waiting for more clarity on the Fed’s policy and that has affected Serbia and other emerging markets such as Poland, Hungary and Romania,” Ljiljana Grubic, analyst with Raiffeisen Bank AD in Belgrade, said by phone. “Domestic investors are concerned about fiscal consolidation.”

Serbia plans to raise 28 billion dinars in four bond sales and 50 million euros in one placement of euro-denominated debt this month, according to the Debt Agency. July repayments stand at 19.7 billion dinars, data compiled by Bloomberg show.

Tough Conditions

The borrowing plan may change after lawmakers adopt a revised 2013 budget later this week to contain the deficit within 178.3 billion dinars, or 4.7 percent of GDP, up from an initially planned 3.6 percent of GDP. The deficit reached 6 percent of GDP in the first quarter.

The International Monetary Fund said on May 22 the gap may ballon to 8 percent of GDP this year if the government doesn’t change its policies.

Yields on Serbian 10-year Eurobonds maturing in 2021 fell 24 basis points to 6.43 percent by 3:49 p.m. in Belgrade today. Yields are up 168 basis points since the IMF issued its report.

Serbia’s revised budget has not been planned to meet tough IMF conditions which are “difficult to meet,” Deputy Prime Minister Aleksandar Vucic said in Belgrade today. “It will not be a tragedy if we don’t reach the agreement” even though Serbia will try to talk with the IMF, he said.

The 11-month old Cabinet of Prime Minister Ivica Dacic will be reshuffled by July 27, one year after taking office, and the changes will be “substantial,” said Vucic, leader of the Serbian Progressive Party of former nationalists. He said he could not exclude the possibility of early elections.

Financial Support

The revised budget relies on lower administrative costs and selling unprofitable companies that will leave thousands without work. Public wages and pensions won’t be cut or frozen.

Serbia has asked the World Bank to financially support its plan for the closure or sale of 179 unprofitable companies, which employ around 54,000 workers. The lender said it’s ready to help secure “technical and financial support” for the effort it described as “critically important to address imbalances in the public finances,” according to a June 28 statement by Ellen Goldstein, World Bank Director for the Western Balkans.

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