Serbia, Finances in times of uncertainty

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In addition to the basic analysis of the proposed budget for the new year 2023, which we discussed in the previous text, the budget proposal also contains other interesting information, primarily in the section of planned project loans and guarantees.

These are often projects that are copied from budget to budget, but they can also be completely new projects that did not exist before. Bearing in mind that there is no public presentation of medium-term planned public investments, although the Government and the President mention in press conferences the document “Serbia 2025” as a framework, this list of projects in the budget is the best possible view of what is actually expected in this domain.

 Guaranteed loans

Giving guarantees for loans is the state’s promise that it will take upon itself and its budget to pay back these loans if the person who raised them cannot pay them back, either in part or in whole. These can only be formalities that reduce the creditor’s risk, so he is ready to offer a loan at a lower interest rate, when such loans are taken by state-owned enterprises that are doing well, are not over-indebted and make a profit, and use that money for new investments that will further improve the company’s performance .

It is a completely different issue when these loans are raised by state enterprises that have bad management, that generate low and irregular profits and are already highly indebted, especially when these funds do not go into profitable investments. In case the debtors do not repay the debt, it will fall on the budget: issued guarantees are not included in the calculation of public debt and deficit because it is considered that companies will be able to repay them themselves, but this is done when the state has to returns them. This is a standard international accounting operation, but during high deficit years this is a frequent instrument of reducing the deficit “on paper” to make public finances look better than they really are.

In the next year 2023, guarantees are foreseen in the amount of 2.3 billion (in the previous year it was only 1.2 billion). The most money is earmarked for EPS – as much as 1.725 billion euros, then for other companies in the field of energy: Elektrodistribucija (a new company, separated from EPS) 187 million euros and Elektromreže 77 million euros; there is also 140 million for Srbijagas, and 173 for Železnica.

In contrast to previous years, when the companies that were issued guarantees were mostly able to repay these loans (except Railways and Srbijagas), this will not be the case now, but the largest part of the repayment of these funds will fall to the budget, directly or indirectly. Srbijagas and EPS will most likely end this year in the red, due to the price policy, because Srbijagas charges gas to domestic consumers cheaper than the price at which it is purchased from Russia, and EPS is forced, due to the 2021 accident, to satisfy the missing part of the electricity by purchasing it from abroad. again at several times higher prices than it ultimately charges domestic consumers. In such a situation, it is almost certain that they will not be able to repay their debts, but they will fall on the budget.

Compared to the previous budget, not only has the total value increased almost twice compared to the previous year’s budget, but a different focus is also visible, as the primary attention was given to energy. There are many more projects in both areas and they are significantly more valuable. There is also a change in the financiers – while it was previously planned that the Russian Federation would finance the revitalization of Djerdap 2, now that project should be financed by commercial banks, and the revitalization project of TENT 1 and TENT 2, for which the Russians also previously prepared financing, was lost. The largest individual projects are the construction of RHE Bistrica, a new biomass plant and system for transporting ash and slag within EPS, which would mean a better and safer supply of electricity and the beginning of the transition to renewable energy sources.

 Project loans

The budget also lists a number of projects for which loans have been approved by creditors, with exact amounts. This does not mean that all these projects will actually be started or completed, but that there is a strong intention of the state to implement them. Some of these projects have been postponed for years, so they don’t really have to start in the next fiscal year as planned, but it is important to see what the state plans are, bearing in mind that the investment plan Serbia was quoted several times by President Vučić in the media. 2025  was never announced, so we don’t know what the state’s investment plans are.

Compared to the previous budget, which proposed investments in the amount of 21 billion euros, which is almost 40% of GDP, this budget was even more ambitious, so the total amount of project loans is now over 31.7 billion euros. In comparison, the level of public debt in September of this year, when the writing of this document was finalized, amounted to 32.4 billion euros, which means that the implementation of this investment plan would double the public debt.

However, according to international methodology, the amount of explicit public debt will only count funds that have actually been withdrawn from creditors, and not the total approved funds per project, so the stated amount of public debt will be much lower: public debt will grow as these projects will implement and will spend funds for their financing. But one should not lose sight of the fact that not all of these funds are intended for financing infrastructure: exactly 10 billion euros should be “budget support”, which is not clearly explained what it means, and could very easily be a euphemism for financing the budget deficit in the coming years.

Of this total amount, almost 5.7 billion euros come from international institutions such as the World Bank, the EBRD, the Bank of the Council of Europe or the development banks of France or Germany, another 3 billion come from institutional investors, i.e. from the capital market through the issue of bonds, another 5.9 billion from other countries, 15.7 billion from foreign corporations, funds and banks, and finally 830 million from Chinese banks and 600 million from commercial banks in the country.

This brings us back to the issue of competition in tenders for the construction of infrastructure – in arrangements with international financial institutions there are serious tender procedures that are more difficult to avoid compared to arrangements with state actors when even weak domestic legislation is often bypassed by concluding an international contract, so it is agreed in advance which the works and at what price will be performed by foreign contractors, and how much by local ones, and those prices are often subject to dispute because without competition in the tender they can be inflated.

Roads, railways and energy

The largest part of the funds allocated in these projects is for road construction: almost 6.6 billion euros in total. The lion’s share of these funds was allocated for the highway to the Adriatic (Požega – Boljare) of as much as 1.550 billion euros, followed by the highways to Zrenjanin (710 million euros), the ring road around Belgrade (Bubanj Potok – Pančevo) of 680 million, Pojate – Preljina (800 million), Kragujevac – Mrčajevci (300 million), and Požega – Kotroman (830 million euros), and the Fruškogorsk Corridor (600 million) and the bypass around Belgrade (680 million). Here you can see that the price of the Moravian Corridor has increased from 600 million euros last year to 800 million this year, while other prices are mostly the same. The big new project is the continuation of the ring road around Belgrade, while the others were mostly copied from the previous budget.

The railway also appears as a big player, with around 3.2 billion euros. The largest individual projects are the reconstruction of sections of the railway from Belgrade to Niš, for which a total of 2.250 billion euros have been allocated (almost half a billion euros more than what was planned the previous year), as well as 1 billion euros for the reconstruction of the railway from Valjevo to Montenegro ( which is a new project that is now appearing for the first time), and another 750 million euros are planned for railway infrastructure.

Last year, it was stated that this last loan would be financed by the Russian Federation, and now it is no longer mentioned, which may just be the omission of this information, or it may also be that the Russian budget can no longer finance such projects, given the previous problems at home that he has to deal with the protracted war in Ukraine. To all this, the development of the Belgrade railway system worth as much as 1.3 billion euros and the first phase of the Belgrade metro with another 1 billion euros (compared to last year’s 700 million) should be added.

As in previous years, the energy sector appears with a large number of valuable projects: there is the construction of the reversible hydroelectric power plant Djerdap 3 (now 1 billion euros instead of last year’s 1.5 billion), solar power plants (800 million euros) and wind farms (1 billion euros, instead of last year’s 500 million euros) in the total amount of even 4 billion, which is almost double the amount compared to last year’s 2.1 billion.

There are also projects for the construction of local communal infrastructure, education or healthcare, but they are much smaller compared to these colossal projects. For communal infrastructure, which mainly means new landfills and water supply, around 1.3 billion euros are expected, as well as another 540 million for the new national stadium and supporting infrastructure. 376 million euros are earmarked for healthcare (construction of a new children’s clinic in Tiršova with 26 million, clinical centers with 150 million – instead of last year’s 113 million and an additional 200 million intended for “health care support” without explaining what exactly, Talas writes.

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