Serbia’s Rating Kept at Junk by S&P With Negative Outlook

Serbia’s non-investment credit rating was affirmed and kept on negative outlook by Standard & Poor’s, which said the Balkan nation faces potential external financing challenges.

S&P left Serbia’s long- and short-term foreign and local currency sovereign credit ratings at BB-/B, saying economic growth potential is outweighed by concern that large parts of the economy remain in recession, which can drive up the fiscal deficit and public debt, the ratings company said in a statement today.

“The ratings on Serbia are constrained by our view of the potential fiscal and external financing challenges that the country faces in light of its high fiscal and external deficits,” as well as “moderate gross domestic product per capita and limited monetary policy flexibility,” S&P said in the statement.

Prime Minister Ivica Dacic, who shuffled his Cabinet in September, has pledged to raise taxes, push back the retirement age for women, crack down on the shadow economy and cut subsidies to state-owned companies to halt an increase in public debt by 2016.

Yields on Serbian 10-year Eurobonds maturing in 2021 rose 4 basis points, or 0.04 percentage point, to 6.177 percent by 6:08 p.m. in Belgrade. The dinar was little changed, trading at 114.0720 per euro, data compiled by Bloomberg show.

Growth Impact

The measures are “unlikely to stabilize the debt-to-GDP ratio in the near term, particularly given their likely contractionary impact on economic growth,” S&P said.

The negative outlook reflects at least a one-in-three chance that S&P could downgrade Serbia in the first half of next year. Key risks are if the government fails to implement fiscal consolidation measures and curb public debt, if borrowing costs rise, or if growth falters, S&P said.

Serbia’s Finance Ministry said it expected “with energetic implementation” of budget consolidation measures, a credit upgrade will be come in the future.

“In that context the affirmed credit rating by Standard & Poor’s today, despite the risks, is seen as a turning point along that path,” the ministry said in an e-mail.

Serbia wants to reassure investors it can rein in a fiscal gap the government estimates may reach 6.5 percent of annual output this year. It is also trying to secure a precautionary credit line from the International Monetary Fund, which refused loan talks in May when Serbia already fell short of its budget commitments.

Before it's here, it's on the Bloomberg Terminal.