Serbia Near Bankruptcy, Eyes IMF Help And UAE Loan: VucicGordana Filipovic and Misha Savic
Serbia must cut public wages and state subsidies to fend off looming insolvency as it looks to the International Monetary Fund and United Arab Emirates for financing, Deputy Prime Minister Aleksandar Vucic said.
The government is preparing measures to squeeze the deficit and shrink public debt without affecting pensions, a crucial demand of the junior ruling Pensions Party, Vucic said yesterday. The cabinet will reveal the steps at a news conference tomorrow, rather than today as originally planned, its press office said in a statement.
“We are virtually on the verge of bankruptcy,” Vucic said in a Prva TV interview. “Measures for economic recovery will be tough and not populist,” affecting between 300,000 and 500,000 public-sector workers. Savings may total between 200 million euros ($271 million) and 230 million euros.
Serbia’s fiscal deficit is expected to reach 8.3 percent of gross domestic product this year, according to the International Monetary Fund. Finance Minister Lazar Krstic said in an Oct. 2 interview the government wants to cut the deficit by as much as 1.6 billion euros by 2016 to assuage investors, who have driven the yield on Serbia’s 2021 dollar bonds more than 2 percentage points higher since May.
“Serbia will comfortably meet its forthcoming obligations,” Krstic said in an interview today. Cash reserves of $1.3 billion as of Sept. 30 were sufficient to service the debts in the last quarter, when the government needs to repay around $1.1 billion, mainly through rollover of maturing domestically issued bonds.
The government raised 80 percent of planned borrowing in 2013 and repaid 77 percent of maturing debt in the first nine months of the year, he said.
Vucic’s comments were “meant to stress the challenges that Serbia would have in the medium term in the event it didn’t implement a set of measures designed to ensure fiscal stability and stimulate growth,” Krstic said.
The yield on those bonds rose 22 basis points, or 0.22 percentage point, to 6.846 percent by 4:40 p.m. in Belgrade today, the highest level in two weeks, according to data compiled by Bloomberg.
Serbia plans to reach a financing deal with the IMF, Vucic said. The Washington-based lender refused to begin talks in May because it deemed the government had failed to meet budgetary commitments.
Vucic, who leads the Serbian Progressives, the biggest and most popular party in Prime Minister Ivica Dacic’s government, said the cabinet will accept some and reject other measures proposed by the IMF. He also said Serbia’s credit rating could be downgraded in the near term.
Vucic’s comments may hurt investor sentiment, Timothy Ash, the chief emerging-markets economist at Standard Bank in London, said in a note to clients today.
“The most inexplicable and damaging,” statement was on a possible credit rating downgrade for the Balkan state, he said. While downgrades did not appear to be “that imminent” last week, “if Vucic continues to talk in this fashion, they will be,” Ash said.
The cabinet is considering borrowing options to keep financing costs under control, Krstic said on Oct. 2, including a $1 billion Eurobond, domestic borrowing or the UAE loan. A Eurobond, Serbia’s fourth in a year, won’t be cheap, he said.
Serbia’s success in issuing debt abroad will depend on whether the government is able to show it is committed to getting its finances in order, Nicholas Spiro, the managing director of Spiro Sovereign Strategy, commented in an e-mail.
“There are many domestic and external pieces that still need to fall into place in order for Serbia to be able to issue dollar debt without paying through the nose,” Spiro said. “Even though sentiment has improved somewhat of late, Serbia is hardly flavor of the month and investors are bound to demand a hefty premium.”
The government expects to borrow $1 billion from the United Arab Emirates by the end of this year and as much as $3 billion by the end of 2014, Vucic said. That figure is lower than the $2 billion to $3 billion Vucic had earlier said would be available this year, meaning Belgrade will now have to make up the difference with other financing.
Half of this year’s UAE loan will be used to retire some of the “most difficult debts” and the other half will be “injected into the economy,” Vucic said, without elaborating.
Serbia will also offer its dominant state-owned land line provider Telekom Srbija AD for sale at a price of between 1.5 billion euros and 2 billion euros, “when we know exactly how to spend those receipts,” Vucic said.