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Serbia chasing after investment rating

Fitch Ratings Inc., one of the big three rating agencies, increased Serbia’s rating from BB to BB+ with stable outlook a few days ago, bringing Serbia’s economy closest to the investment rating so far.

Nevertheless, Serbia’s rating remains speculative, i.e., as explained on the Fitch scale, we belong to the group of countries with “increased exposure to bankruptcy, especially in the event of adverse changes in business or economic conditions over time.”

The other two agencies are slightly worse, so in September Moody’s gave us a Ba3 rating with a positive outlook, which is three levels below the investment rating, while at Standard and Poor’s we have a BB rating with a positive outlook, which is two steps below the investment rating.

The latter increase will not have a significant effect, given that the EMBI index measuring countries’ borrowing risk for Serbia is relatively favourable, as explained by Dejan Soskic, a professor at the Belgrade Faculty of Economics.

– An important step would be to get an investment rating, because then much larger sources of public debt financing are opened and it becomes cheaper. However, today at such low interest rates, this does not have much effect, so the reduction of interest rates on public debt is less significant than at the time when there were normal interest rates – explains Soskic, adding that Serbia’s progress with rating agencies is the result of last year’s good growth, which is again the consequence of one-off factors.

Soskic says last year’s 4.4 percent was the result of a bad previous year, but we already have less than expected growth this year.

– We have a marked slowdown in economic activity this year, with growth of 2.9 percent in the first half. Investments have not increased significantly, they are still at 18 to 19 percent of GDP, which is not enough for significant economic growth. And the markets we rely on, primarily German and Italian, have low growth rates, affecting the entire region. There is no impediment to high economic growth, primarily due to low domestic investment, which is a reflection of citizens’ lack of confidence in state institutions – notes Soskic.

He adds that growth prospects are not particularly good.

– Increasing the rating is good news, but it relies on past results, on the reduction of public debt in GDP, on fiscal consolidation, and partly due to the policy of overestimating the RSD exchange rate, which in the long term hampers exports, and makes import cheaper. Anyhow, this is demonstrated by an increase in the foreign trade and balance of payments deficit – warns the former governor of the National Bank of Serbia, adding that for the time being, foreign direct investments cover this gap, but the trend is not good.

Milojko Arsic, a professor at the Belgrade Faculty of Economics, also agrees with this view, pointing out that an increase in credit rating is a good result, but to reach an investment rating we need solid results over the next few years.

– Improving the rating brings more favourable terms of borrowing for both the state and the companies and reduces the difference between the interest received by the developed countries and those we pay. With an investment rating, our debt would also be financed by conservative investors, not just those who accept higher risk – Arsic points out, noting that this should further reduce public debt and maintain macroeconomic stability.

For Ivan Nikolic, editor of Macroeconomic Analysis and Trends, stepping up to an investment rating is a sign that we have finally set up and put our economy in order.

– Credit rating refers to the regularity of payment of future liabilities. Higher ratings bring better borrowing terms, although interest rates are low now. According to some projections, Standard and Poor’s should give us an investment rating in 2021, but it is likely that by the end of the year both Moody’s and Standard and Poor’s will improve their ratings, as they often follow each other – Nikolic predicts.

He points to last year’s high growth, low inflation and approaching public debt at 45 percent, which is considered sustainable for countries like Serbia.

Public Debt

According to the data of the Public Debt Administration, public debt stood at 51.9 percent of GDP at the end of July this year, down from 53.8 percent from the end of last year (though the debt increased by EUR 834 million in nominal terms). This was due, inter alia, to the early repayment of part of Eurobonds with maturity in 2020 and 2021 in June this year. Specifically, the state repurchased USD 1.1 billion of these bonds, but it had to pay investors USD 51.25 million. At the same time, the government was issuing ten-year Eurobonds worth EUR 1 billion at an interest rate of 1.5 percent. Interest rates on dollar Eurobonds are 7.25 percent for emission with maturity in 2021 and 4.875 percent for bonds with maturity in 2020.