Serb Central Bank Cuts Growth Forecast on Car-Export Outlook

Serbia’s central bank cut its 2014 economic growth forecast for the second time in three months, citing limited scope for further expansion of car production and government belt tightening.

Gross domestic product will expand 1 percent this year, rather than 1.5 percent as estimated in November, the National Bank of Serbia in Belgrade said in its quarterly inflation report today. GDP will grow 2 percent in 2015, it said.

The central bank left borrowing costs unchanged Feb. 13 for a second month as the dinar weakened before snap elections next month and as investors shunned emerging-market assets. The bank said today it will seek space for further monetary easing to support growth, dragged down by a fiscal overhaul and stagnant demand for cars produced by Fiat SpA’s local plant.

“Fiat will probably keep its production unchanged from this year and if their output volume doesn’t expand, there will be no export growth,” Ljiljana Grubic, analyst at Raiffeisen Banka AD in Belgrade, said by phone today. “The government’s fiscal consolidation will lead to even lower state and corporate spending, weighing on economic activity.’”

Serbia’s dinar has weakened 1.2 percent against the euro this year. It rose 0.3 percent to 115.9564 per euro as of 5:14 p.m. in Belgrade, according to data compiled by Bloomberg.

Target Range

Inflation will accelerate through March from a record-low 1.6 percent in November, to return to a target range of 2.5 percent to 5.5 percent, fueled by regulated price increases and the one-time impact of a higher sales tax, the bank said.

The inflation rate probably was within that band last month, Vice-Governor Veselin Pjescic told reporters in Belgrade. The statistics office is due to publish January data tomorrow.

Prices probably rose 2.9 percent from a year earlier in January, according to a Bloomberg survey of 24 economists.

Threats to inflation include growing risk aversion among investors as the Federal Reserve keeps scaling back monetary stimulus, which may further weaken the currency, the bank said.

The central bank sold 510 million euros ($698.5 million) this year through Feb. 13 to slow the dinar’s slide. Portfolio investors withdrew 100 million euros and banks repaid between 150 million to 170 million euros in foreign loans in the first six weeks of 2014, Pjescic said.

“We still can’t assess the full impact of reduced liquidity on the market, but we see those pressures as temporary,” Pjescic said.

Shrinking Gap

The current account deficit fell by almost a half to 5 percent of GDP last year and will remain at about this level in 2014, the bank said.

Net foreign direct investment will rise to about 1 billion euros this year, from 760 million euros in 2013, with about 45 percent invested in the energy sector and the rest going to trade and manufacturing, Pjescic said.

Bank lending contracted 5 percent last year as banks remain reluctant to grant new loans with high non-performing loans, the bank said. The NPL ratio was 20.7 percent at the end of last year.

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