By Nick Mann | 17 August 2012
Fitch Ratings has revised its outlook for Serbia from stable to negative following the new government’s decision to change how its central bank is run before reducing its deficit.
In a note issued yesterday, the ratings agency also warned that the amendments to central bank law, including how the governor is appointed, had dented investor confidence. It could also make it harder to secure International Monetary Fund support.
Serbia held elections in May 2012 but a new coalition government led by Socialist Party leader Ivica Dacic only came to power on July 27. This delay caused a ‘stalemate’ in fiscal policy, which prompted Fitch to revise its deficit forecast up from 5.5% of gross domestic product to 6.5%.
Government debt is also now expected to reach 55% of GDP this year, well above the country’s fiscal rule limit of 45%, and the 39% average Fitch expects for a country to receive a double-B rating. Serbia currently has a double-B-minus rating.
‘Fitch views it as a negative signal that the new government decided not to quickly address its twin deficits and rising public debt problems but rather decided to focus on changing the law on the central bank,’ the note explained.
‘The move was perceived by the markets as a way to limit the central bank’s independence and has dented market confidence.’
Fitch noted that while there was a limit on the country’s public debt, there was no clear process for enforcement if the threshold was breached. ‘Should the government not take any action to address the rise in public debt, credibility of the fiscal rule would be undermined,’ it said.
The agency also downgraded its GDP forecast for 2012 from flat growth to a fall of 1%, following two consecutive contractions in the first part of the year. In April to June, Serbia’s economy shrank by 0.6% compared with the previous year.
Serbia’s fiscal deficit and its ‘relatively large’ current account deficit make it likely the country will need IMF support, Fitch said. In September 2011, the Fund agreed to make €1.1bn available to the country on a precautionary basis known as a Stand-By Arrangement.
‘The new government has signalled it wishes to negotiate a new agreement, rather than restarting the original SBA,’ Fitch explained. ‘Although the IMF deal was only designed as a precautionary support, this has now changed and Fitch considers regaining access to the IMF to be important.’
The agency warned that if the new government failed to present a medium-term fiscal consolidation programme, its rating could be downgraded. Further falls in the country’s foreign exchange reserves could also trigger a negative rating action.
But if growth could be restored, external imbalances reduced and progress made towards Serbia joining the European Union, the country’s rating would improve.
