Event

The World Bank approved a USD 100bn loan to support Serbia in reforming its state-owned enterprises (SOEs). It is a positive step as the SOEs imposed heavy fiscal costs – of over 2% of GDP in 2013 according to the World Bank – and hence represent a drag on public finances and more generally on the Serbian economy which is suffering from anaemic growth (cf. graph).  The World Bank’s loan approval follows the approval of a precautionary Stand-By Arrangement by the IMF in February 2015.

rm-april2015

Impact on country risk

Growth prospect for 2015 is weak as the economy is likely to remain in recession against the backdrop of ongoing (sizable) fiscal consolidation. Moreover, corporates’ access to credit remains difficult amid tight lending standards in the banking sector in a context of high corporate indebtedness (and hence high perceived credit risk). Hence, commercial risk is elevated. On the positive side, Serbia’s liquidity is solid as indicated by Credendo Group rather favourable ST political risk classification (in category 2). This favourable classification is explained by the large foreign exchange reserves. The latter were under pressure in 2014 but they are likely to increase this year as the current account deficit is expected to narrow and the ongoing fiscal consolidation is likely to boost investor confidence and hence capital inflows. On the medium term, challenges are huge stemming from poor public finances, a weak banking sector, low savings and investment rates, large external debt and debt service ratios, structural weaknesses such as deep-rooted competitiveness problems, structural rigidities and a weak business environment. In this context, the precautionary IMF SBA programme is a positive development as it would help the government to implement its ambitious and broad-based agenda of structural reforms. However, given the previous policy slippages, the full implementation of the IMF programme could not be taken for granted even if the ruling coalition (in power since April 2014) is strongly committed to reforms and EU accession. What is more, ongoing geopolitical tensions and change in the global market sentiment could further complicate the implementation of badly needed structural reforms.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com