LONDON: Fitch Ratings has projected Serbia GDP growth to moderate to 4.4% in 2022 and 3.9% in 2023, while affirmed Serbia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB+’ with a Stable Outlook.
Serbia’s rating is supported by a credible macroeconomic policy framework, relatively low inflation, somewhat higher foreign exchange reserves, and stronger governance, human development and GDP per capita compared with ‘BB’ medians.
“Economic resilience to the pandemic shock, a limited increase in public debt, and our confidence in fiscal consolidation prospects also support the rating and Stable Outlook,” Fitch said.
Set against these factors are Serbia’s greater share of foreign-currency denominated public debt, higher net external debt, and persistently wider current account deficit than peer group medians, as well as a high degree of banking sector euroisation.
Fitch has revised up its GDP growth forecast for 2021 to 6.3% on the back of a strong rebound in domestic demand in 1H21, above the ‘BB’ median of 4.7%.
There has been a fast Covid-19 vaccination rollout, at 86 doses per 100 people, but recent progress has stalled due to vaccination scepticism, and the potential for economic restrictions to contain a new wave represents a risk to our forecast.
“We project GDP growth moderates to 4.4% in 2022 and 3.9% in 2023, slightly above our assessment of the trend rate, which is constrained by unfavourable demographics and weak total factor productivity growth”.
Inflation rose to 3.3% in July, from 1.1% in January, mainly due to supply-side pressures with core inflation more stable at 2.0%, and we project a moderation to an average 2.6% in 2022-2023, within the target band. Inflation has averaged 2.0% over the last seven years, below the ‘BB’ median of 2.9%.
“We anticipate a steady reduction in the general government deficit in 2021-2023, following last year’s large stimulus package, which drove a 7.9pp widening to 8.1% of GDP,” Fitch said.
The deficit narrowed sharply in 1H21 to 1.3% of GDP (annualised), with tax revenues up 21% yoy, and large expenditure under-execution. Fitch forecasts a full-year deficit of 5.5% of Serbia GDP, which assumes new discretionary fiscal spending partly related to next year’s elections and a marked acceleration of capital execution, but still below the government’s target of 6.9%.
“We project the general government deficit narrows to 3.2% in 2022 as support measures are unwound and to 1.9% in 2023, and expect fiscal rules will be developed under the new IMF Policy Coordination Instrument (PCI), targeting a medium-term deficit of below 1% of Serbia GDP”.
Financing conditions have improved, with the inclusion of three benchmark bonds in the JP Morgan Emerging Market Index helping revive demand for domestic debt, which could be further supported by potential access to Euroclear settlement in 2022. There has been continued strong demand for Serbian Eurobonds, which we expect will comprise near 60% of full-year financing, and the single treasury account reserve had risen to 4.5% of GDP at end-August, from 3.2% a year earlier.
Fitch forecasts general government debt/GDP to peak at 59.5% in 2021 (having increased 5.4pp last year to 58.2%) and gradually decline to 57.7% at end-2023, broadly in line with the projected ‘BB’ median of 57.0%.
The average maturity of government debt has lengthened to 6.7 years from 6.1 at end-2019 and the foreign-currency share of debt reduced 2pp to 69%, but is well above the peer group median of 51%.
Foreign exchange reserves rose to EUR14.6 billion at end-July, from EUR13.5 billion at end-2020, and above the pre-pandemic level. Net external debt is projected to fall 6.6pp in 2021 to 28.6% of GDP, but still compares unfavourably with the peer group median of 18.4%.
The current account deficit narrowed 2.6pp in 2020 to 4.3% of Serbia GDP and to 1.7% of GDP (annualised) in 1H21, and Fitch forecasts a widening to average 3.7% of GDP in 2022-2023 due to higher repatriation of foreign company earnings and stronger import growth.
“However, we project this continues to be more than covered by average net FDI inflows of 5.9% of GDP in 2021-2023, and foreign exchange reserves rise from 6.1 months of current external payments at end-2021, to 6.6 at end-2023, above the ‘BB’ median of 5.2 months”.
Fitch expects broad policy continuity, with consolidation of the macroeconomic framework helped by the renewal of the IMF PCI, but much more limited progress on structural reforms. As anticipated, a new 30-month PCI was agreed in June, which includes measures to enhance public financial management, strengthen SOE governance, and develop capital markets.
President Vucic and his SNS party are overwhelming favourites to win presidential and parliamentary elections scheduled by April 2022.
“The opposition is highly fragmented and the outcome of their negotiations with the government over electoral processes and media representation is uncertain, but our base case is for opposition participation in the elections. While there could be a repeat of widespread protests around the election, we do not expect this would threaten the stability of the administration or economic confidence”.
Progress towards EU accession has remained slow, with no new areas opened since 2019. The revised EU process of bringing together technical competencies into clusters has been operationalised this year, with one cluster agreed.
Fitch expects a long delay to the target EU accession date of 2025, with rule of law and relations with Kosovo the main constraints. Entrenched vested interests are likely to hold back measures on freedom of expression, judicial reform, anti-corruption, and organised crime, and EU standards in these areas could be higher than for previous accession countries.
Last September’s US brokered agreement was a step towards normalising economic relations with Kosovo, but there has since been a lack of tangible progress towards a sustainable settlement which is unlikely to change ahead of next year’s general election.
