Serbia Starts IMF Loan Talks to Get Investors’ Confidence

Serbia started loan talks with the International Monetary Fund for the first time since a deal collapsed two years ago, with a pledge to curtail spending amid a deepening recession and plans for fresh market borrowing.

The two-week negotiations will analyze Serbia’s budget plans and measures to rein in public debt, the National Bank of Serbia in Belgrade said in an e-mailed statement today. The IMF and the government will also discuss ways to reduce the size of the public sector and “restructure public companies,” it said.

“I am more skeptical on the IMF deal right now,” Peter Attard Montalto, an emerging-market strategist at Nomura International Plc, said by e-mail today. Serbia is “prefunded enough and has enough support from U.A.E., China and Russia. They will end up with a facility at the end of the day but they can play hard ball with the fund until into New Year, maybe.”

Prime Minister Aleksandar Vucic, who has avoided dealing with the IMF since his first election victory in May 2012, is looking for a three-year program, he said in an interview on Oct. 30. Vucic is trying to restore growth after unprecedented floods in May damaged farming and power generation. He has pledged to cut public wages and pensions to narrow the budget deficit from about 8 percent of output this year.

Unprofitable Companies

The government plans to show its commitment to overhauling public finances as early as next week, when it will present a list of around 100 unprofitable companies that will be closed down, Economy Minister Zeljko Sertic said today. While the move will leave “thousands” out of job, the cabinet has already set aside money for redundancy payments, he said.

The yield on Serbian dollar bonds maturing in 2021 fell one basis point to 4.750 percent as of 5:03 p.m. in Belgrade, according to data compiled by Bloomberg. The dinar traded 0.2 percent weaker against the euro at 119.3445.

Finance Minister Dusan Vujovic expects to reach an agreement with the IMF by Dec. 25, he told state TV RTS today. An accord could help stave off pressure on the dinar as the U.S. Federal Reserve ends a record bond-purchase program, according to Nomura’s Montalto.

Vucic wants to prepare Serbia for European Union membership by 2019 while maintaining close economic and political ties with Russia. He said he hopes for an IMF agreement before the end of 2014 to reassure investors that his policies will lead to more sustainable public finances over three years.

Budget Support

Serbia continues to rely on the EU for trade and investments, on China and Russia for infrastructure projects and on U.A.E. for budget support.

The biggest of the former Yugoslav states is looking for a “precautionary loan program,” which is “sufficient when you have solid liquidity,” Nebojsa Savic, head of the central bank governor’s council, a 5-member advisory body, said by phone yesterday. “It gives an opportunity to quickly draw funds if necessary.”

The government wants to raise 1.25 billion euros ($1.56 billion) in a Eurobond sale, according to the revised 2014 budget. While Vucic expects the Eurobond sale in the first quarter of 2015, Vujovic said on Oct. 22 the sale will happen before the end of 2014. Serbia held four Eurobond sales between September 2012 and November 2013, raising $4.25 billion.

“Our main scenario is that the authorities will make ends meet with the IMF,” Roxana Hulea, an emerging-markets strategist in London at Societe Generale SA, said in an e-mail yesterday.“I believe this will be the straight-jacket Serbia needs at this point and regular monitoring will manage to accelerate the process of reining in the large imbalance.”

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