Serbia Seen Imperiling IMF Credit Line as Bonds DeclineKrystof Chamonikolas and Gordana Filipovic
Serbian bonds are signaling concern the surprise resignation of Finance Minister Lazar Krstic will upend government plans to cut the biggest budget deficit since strongman Slobodan Milosevic reigned.
The extra yield on the dollar note due September 2021 over U.S. Treasuries jumped to a more-than two-month high yesterday after Krstic stepped down on July 12, saying Premier Aleksandar Vucic didn’t back his austerity plan to lower pensions and public-sector wages. He was replaced by Dusan Vujovic, a former World Bank economist who promised smaller spending cuts.
Softer austerity measures risk scuttling a credit line that the ex-Yugoslav republic wants from the International Monetary Fund, said Carlos Ortiz, an economist at UniCredit SpA. Krstic quit a day after Fitch Ratings said the cabinet’s “ambitious reform program” would help Serbia cut the gap to 5 percent of economic output by 2016 from 8.7 percent this year.
“I am now more cautious on Serbia than I was last week,” Martin Marinov, a money manager who helps oversee about $1 billion of fixed-income assets in emerging markets including Serbian debt at Raiffeisen Kapitalanlage GmbH, said by phone from Vienna yesterday. “An agreement with the IMF in the autumn, which was priced in the bonds, is less probable now.”
Vucic’s three-month-old government scrapped its 7.1 percent deficit target after the country was hit by the worst floods in a century in May. Fifty-seven people were killed and damage totaled an estimated $2 billion, or 5 percent of Serbia’s gross domestic product. The economy will contract in 2014 for the third time in five years, according to Krstic.
While the government will continue with “difficult fiscal consolidation,” Krstic’s plans were impossible to implement, Vucic told journalists on July 12. He plans to amend the 2014 budget and draft one for next year by mid-September.
Krstic, a former McKinsey & Co. associate principal and a graduate of Yale University, had proposed cuts of at least 20 percent in pensions and 15 percent in public wages, 160,000 layoffs in the public sector over two years and a 30 percent increase in electricity prices.
“Krstic was by far one of the most pro-reform members of the cabinet” and his removal “points to government complacency and raises doubt as to its ability to bring public finances to a sustainable level,” London-based Ortiz at UniCredit wrote in a July 14 report to clients. “Any watering down of the reforms could create stumbling blocks for negotiations with the IMF.”
The IMF has not changed its stance toward Serbia since the shakeup in the Finance Ministry or the timetable for new talks, according to IMF representative Daehaeng Kim in Belgrade.
“We welcome the authorities’ continued commitment to reforms aimed to restore fiscal sustainability and improve the investment climate,” Kim said in an e-mailed statement today. “We look forward to continuing the policy discussion and program negotiations in the fall, as previously agreed.”
The yield on the government’s 2021 debt fell three basis points today to 5.08 percent, according to data compiled by Bloomberg. The rate surged 18 basis points in the previous two days, lifting the premium over comparable Treasuries to 293 basis points yesterday.
The government remains committed to winning a three-year precautionary loan program from the IMF by September or October even as it eases off on spending cuts, the new finance minister said in a Belgrade interview a day after Krstic resigned. Vujovic said he sought “equally credible but socially more doable” changes to keep the country from going bankrupt.
Investors are overestimating the risks connected with the departure of Krstic, which was part of “a more complex game of politics, mainly designed to contain social risks,” Roxana Hulea, a London-based strategist for emerging markets at Societe Generale SA, said in a report to clients dated July 14.
“While this weekend’s news has yet again dented appetite for Serbian assets, we would advise against overreacting,” she said. “Fiscal adjustment seems to be now tortuously underway.”
Serbia is turning to the IMF for the first time since the Washington-based lender suspended its program in 2012 because the country failed to meet its budget targets.
Serbia, which opened talks on European Union membership on Jan. 21, is struggling to transform its economy devastated during the 1990s wars and sanctions that accompanied the breakup of former Yugoslavia under the reign of Milosevic, who died awaiting trial in The Hague for war crimes.
Vucic, the former information minister for Milosevic, is trying to lure investors following a landslide victory in March parliamentary elections, hoping to lower unemployment in a country where the average monthly wage is around $476 and one in four is out of work.
“The revised budget is due to be agreed on in September and we believe the market could see increased volatility up until this date,” UniCredit’s Ortiz said. “A lack of deep reforms could put the signing of the IMF loan at risk, and put Serbia’s credibility into question once more.”