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Erste Bank Forecasts Stability in Serbia’s Investment Rating

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Serbia is on the verge of a credit rating change, striving to upgrade its current non-investment grade to an ‘investment’ rating, but Erste Bank analysts do not foresee this happening this year. One of the reasons they believe a change won’t occur is due to political factors.

“We see a change in outlook to positive as a likely scenario in Serbia. Although positive outlooks are quite probable, an upgrade may remain elusive due to political factors,” Erste Group stated in a report.”

Currently, Serbia is rated by credit agencies as ‘BB+’ with a stable outlook, which, according to the explanation of the National Bank of Serbia, represents a non-investment level. This means there is “an ability to meet financial obligations, but there is a risk of changing the business climate and economic conditions, as well as a significant credit risk.”

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The next level that politicians in Serbia aim to achieve is the investment-grade ‘BBB,’ which implies “satisfactory ability to meet financial obligations, with moderate credit risk.”

According to the opinion of the Erste Banking Group, Serbia has maintained a solid economic development despite obstacles, high inflation, and rising interest rates.

The external position is solid, as the current account deficit is decreasing, and the inflow of foreign direct investment remains robust.

In comparison to countries with a BB+/Ba1 rating, Serbia stands out in key indicators such as GDP per capita, according to bankers.

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“In 2022, Serbia had one of the highest GDP per capita (9,394 US dollars) among countries with a BB+ rating. In comparison to countries with one rating level higher, noticeable lagging behind is observed in comparison to Hungary, Romania, and Greece,” states the Erste Group report.

Energy and politics

The report also notes that electricity production in Serbia relies on approximately 70 percent low-quality lignite. However, it highlights a contracted investment of two billion euros from China in renewable energy sources.

Most emissions come from the energy sector, with transportation and industrial processes also contributing significantly to Serbia’s CO2 emissions, according to Erste.

According to economic analysts, following a convincing victory in the December elections, the Serbian Progressive Party (SNS) and President Aleksandar Vučić will “face the challenge for Serbia in terms of resolving relations with Kosovo and aligning with the EU’s foreign policy as a candidate country for membership.”

Additionally, even though, based on the latest aid package for the Western Balkans, Serbia and other countries have the opportunity to spend two billion euros in grants and four billion euros in concessional loans, to access these funds, the countries will need to “prepare a reform agenda” based on existing recommendations.

What do the agencies say?

According to the latest reports focusing on Serbia, credit agencies have all cited political issues as the most significant factor when it comes to improving the country’s credit rating. In its report from September last year, Moody’s notes that the Russo-Ukrainian war and related geopolitical tensions have increased Serbia’s vulnerability to risks from political events.

“While geopolitical developments have not weakened foreign investment so far, Serbia’s long-term misalignment with EU foreign policy could hinder the EU accession process and discourage FDI, especially if the conflict further escalates. Serbia’s energy dependence on Russia also remains significant. Normalizing relations with Kosovo, along with progress in the rule of law, remains crucial for advancing EU accession,” states Moody’s.

Fitch Agency also mentions a deadlock in relations with Kosovo. They state that the Kosovo issue is a stumbling block for Serbia’s accession to the EU, and progress in “other areas is also necessary.”

“Serbia has a relevance score of 5 for political stability and rights, the rule of law, institutional and regulatory quality, and control of corruption, all of which have a negative impact on the credit profile,” according to the report from August last year.

Credit rating agency Standard & Poor’s, in a report from October last year, identifies several issues such as a relatively weak institutional structure in the country, a relatively low level of economic wealth per capita, a significant net external debt position, and a high degree of euroization in the economy.

“Therefore, Serbia’s progress in EU accession is likely to depend on the outcome and implementation of agreements with Kosovo supported by the EU, as well as compliance with EU sanctions against Russia. We do not expect a shift in the next year,” analysts at S&P stated in the report.

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