In the days when we are waiting for the results that will show how the year started, the information that the international rating agency Moody’s has increased Serbia’s credit rating is one of the few important economic news. Moody’s is one of the three most influential agencies and its ratings shape the attitudes and behavior of creditors and investors around the world. The thing is simple: instead of assessing the quality and security of countries themselves, business people follow what institutions and organizations such as the IMF, the World Bank or rating agencies say.
The country’s rating is determined on the basis of its economic results and expectations regarding future trends. Thus, in the latest Moody’s report, Serbia was praised for “resilience” (smaller decline in economic activity than in other countries) and for macroeconomic stability, and in 2021 more dynamic growth is expected (although slightly lower than official projections) and a sustainable fiscal situation. Credit rating is associated with the most important economic results. It affects GDP, the price of borrowing, inflation, living standards. If the credit rating is higher, capital circulates more easily and interest rates are lower. And then everyone makes savings – the state pays less interest from the budget, and both companies and citizens can count on cheaper borrowing. That Serbia’s credit rating has not increased on a wave of optimism is also shown by the fact that the ratings of other countries (Montenegro, Tunisia, Mauritius) have deteriorated at the same time. It is also important that the positive trend of Serbia’s rating continues, since all agencies have been improving or keeping their ratings unchanged in their periodic reports for years (therefore, they do not spoil them; the last time this happened was in 2012).
After the previous general assessment, some facts must be pointed out that shed additional light on Moody’s rating increase. The first is that this agency has set out on the path that the remaining two leading agencies have already taken before. Namely, Moody’s increased the rating to Ba2, while others (Standard & Poor’s and Fitch) have already rated Serbia better than that (BB +, a degree higher than Moody’s rating). So, it could be said that Moody’s is lagging behind other agencies, so it is unlikely that the international business community will be delighted with Moody’s current assessments. Secondly, the credit rating of Serbia is growing, but it is still at the level of the so-called speculative. To move to the investment rating, it is necessary to pass two more steps (at Moody’s) and one step at the other two agencies. Montenegro, Macedonia, Albania have a worse rating than Serbia, Croatia (but not investment) has a slightly better rating, while Bulgaria, Romania, Hungary, Slovenia, Slovakia, the Czech Republic and Poland have an investment rating.
Credit rating is important, but it is not the only determinant of the interest rate at which the state will borrow on the international market. At the moment, the price of borrowing by Serbia is higher than in some countries that have a worse credit rating (for example, Greece), but it is also lower than in other countries with a higher credit rating (Hungary and Romania). This means that creditors also look at the dynamics of the credit rating (whether it is deteriorating or improving, regardless of the level it is currently at), and the specific moment of borrowing is also important. If interest rates in the world are generally high, the interest rate will be higher for us as well. Because of all this, interest rates cannot be compared without considering the circumstances. Thus, our extremely high interest rate of seven and more percent from ten years ago was responsible for a bad economic policy, but also for an awkward moment (high interest rates in the world). Last year’s government borrowing rate (slightly more than three percent) was quite high, because we borrowed at the beginning of the corona crisis when the risk premium jumped, while the recent rate (slightly less than two percent) is quite favorable (good grades matched international institutions and cheap money in the world).
Finally, one important message emerged from empirical research. Applies to all countries, and especially to those in development (such as Serbia): a worsening credit rating increases the cost of borrowing much more than an improvement in the rating reduces the cost of borrowing. In other words, the most important thing is not to go downhill. That is why a responsible economic policy should be pursued. Moody’s report expects public debt to stabilize this year and begin to decline next year, and that will only be possible if the fiscal deficit is kept under control. The problems with public companies and the bad marks that Serbia received in the area of the rule of law and corruption are also pointed out. It is simple: Serbia is an active participant in the international capital market, and it will deserve a better place and placement in the first league if it does what is known to be done here and there, Nova reports.
