Serbia and IMF Working on Plan to Fix Finances, Cut Debt

Serbia is working on a plan with the International Monetary Fund to trim its fiscal gap by as much as 1.6 billion euros ($2.2 billion) by 2016 to assuage investors and stop its credit rating from sliding deeper into junk.

Finance Minister Lazar Krstic said talks with an IMF mission in Belgrade this week “started in a positive manner” and a “wider negotiating mission” may return in the near future. The Fund refused to start talks on a possible aid deal with Belgrade in May when it said this year’s budget shortfall could jump to as much as 8.3 percent of gross domestic product unless measures were taken.

After two recessions in three years undercut tax revenue and drove the fiscal shortfall wider, the biggest former Yugoslav republic is trying to right its public finances and rein in rising borrowing costs. It needs 4 billion euros in financing by mid-2014, equivalent to 13 percent of GDP, to finance the budget and service debts.

“In order to stabilize public debt by 2016 we need to have fiscal consolidation of around 1.5 percent of GDP a year,” Krstic said in an interview yesterday. The savings will be achieved “through structural reforms” in public administration, state-run companies, health and education and financing. They may not necessarily translate into an equivalent drop in the fiscal deficit, Krstic said.

Yields on Serbian 10-year Eurobonds maturing in 2021 fell three basis points, or 0.03 percentage point, to 6.587 percent on yesterday, compared with 4.8 percent in January, according to data compiled by Bloomberg. The cost of insuring the debt with five-year credit-default swaps rose two points to 374 yesterday.

Maneuvering Space

Krstic, a former McKinsey & Co. associate principal and Yale graduate, assumed his post last month after Prime Minister Ivica Dacic revised the 2013 budget and revamped his cabinet. Krstic said Serbia’s government “still has some maneuvering space” before seeking an IMF deal. He said the government will unveil measures to trim the deficit on Oct. 7.

Serbian deputy Prime Minister Aleksandar Vucic said in Belgrade today that the IMF wanted Serbia to save 800 million euros in the next two years and cut the deficit by 2.25 percent to 2.5 percent over the same period.

The government is considering various borrowing options to keep financing costs under control and Krstic, who took office a month ago, is keen on assuring investors that “we will consolidate public finances,” he said.

The possibilities include a $1 billion Eurobond, domestic borrowing or a loan from the United Arab Emirates of as much as $3 billion, which would help replace some old expensive debts, he said. Selling a Eurobond, the fourth since September 2012, won’t be cheap, Krstic said.

“Fed tapering, capital outflows from emerging markets over recent weeks, weaker bond demand and a shift from bonds to equity makes our borrowing more expensive,” Krstic said. He is considering different markets and currencies, weighing future foreign exchange risk against anticipated macroeconomic developments. Plans are taking into account “new market realities,” he said.

The government’s plan to narrow the deficit and public debt could convince bond investors to take lower yields, while also keeping Serbia’s credit ratings intact, Krstic said. The country is rated BB-by Standard & Poor’s and Fitch, while Moody’s assigned non-investment grade B1 rating to Serbia’s local and foreign-currency bonds on July 14.

The government is currently cutting discretionary spending to cut the budget gap to 4.7 percent of GDP, Krstic said. The IMF says that, even with consolidation measures, the shortfall will be 6.5 percent of annual output.

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