Serbia Needs Bad-Loan Fix to Overcome Slump, World Bank Says

Serbia needs to tackle the growing level of bad loans strangling its economy for the nation to overturn the fourth recession in six years, a World Bank official said.

The Washington-based lender will hold talks with the government in Belgrade in April to work out a strategy how to address non-performing loans that accounted for 23 percent of lending at the end of September, according to Abebe Adugna, the World Bank’s lead economist for Europe and Central Asia. The bank will join the International Monetary Fund and the European Bank for Reconstruction and Development in efforts to help ease the credit backlog.

“There’s a huge, pressing problem about restoring credit flows to firms, households and corporates in general and high NPLs are discouraging banks from lending more,” Adugna said in an interview on Friday. “Corporates owing loans to banks need some kind of restructuring and bankruptcy, but on the bank side, there must be some effort to write off those loans.”

Premier Aleksandar Vucic, who wants to prepare the biggest former Yugoslav republic for European Union membership by 2020, is struggling to restart growth as the country’s fourth recession since 2009 has left one in five out of work. The central bank cut its benchmark interest rate to 7.5 percent in March as it tries to encourage cheaper lending.

The World Bank, which is preparing a five-year support program for Serbia, said it’s “trying to support the government” in pushing through measures to overhaul the $46 billion economy, Adugna said. “Things might get worse before they get better,” he said.

Budget Support

The government has pledged to sell or close more than 500 state-owned enterprises and overhaul major utilities including gas, power, road and rail companies to secure a 3-year, 1.2 billion-euro ($1.3 billion) stand-by loan from the IMF. The World Bank, which has linked aid to Serbia to progress under the IMF deal, will decide on Tuesday about the first $100 million loan to support its budget.

The yield on Serbia’s dollar bond maturing in 2021, fell 4 basis points to 4.55 percent as of 9:11 a.m. in Belgrade, after hitting a record-low of 4.26 percent on Feb. 26, according to data compiled by Bloomberg.

“The reform agenda in front of this government is huge” and “there are some negative consequences in terms of employment, people losing jobs, so an important risk that needs to be mitigated and managed well is on the social side,” said Adugna.

Addressing non-performing credit may include measures to improve the legal framework for contract resolution, corporate restructurings, debt writedowns and the sale of bad loans in secondary markets, the World Bank economist said.

The medium-term economic outlook depends on how well the country manages its “pronounced commitment” to European integration and “important economic links” with Russia, Adugna said.

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