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Serbia’s aggressive bond sssuance: Funding EXPO 2027 amid growing concerns and positive outcomes

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Serbia is actively continuing its issuance of eight-year bonds, a process that commenced on October 24 at an unprecedented pace. The objective is to raise funds for the ambitious EXPO 2027 project. Notably, there has been a decline in yield rates, with the first auction in October recording 6.39%, followed by 6.12% in the subsequent month. The most recent auction achieved a precise six percent yield.

The auction’s total volume reached 2.88 billion dinars, featuring a coupon rate of seven percent. A substantial 287,832 government bonds were successfully realized, amounting to a nominal value of 2.88 billion dinars, equivalent to approximately 24.57 million euros.

This marks the fifth occasion that the Public Debt Administration has orchestrated debt issuances for infrastructure developments linked to the new fairgrounds in Belgrade. The financing value through bonds has escalated from the initially announced 110 billion to an impressive 150 billion dinars.

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Potential Risks

Economists from the Bulletin of Macroeconomic Analysis and Trends (MAT) stress that borrowing policies are intrinsic to the country’s macroeconomic strategy. The success of such policies hinges on the efficacy of the broader macroeconomic approach. Accordingly, the sustainability of external debt is closely intertwined with the chosen model for economic growth, as highlighted by MAT.

In its latest report, Fitch agency outlines potential challenges that Serbia might encounter, possibly leading to a reduction in its credit rating. Factors such as the continual increase in general government debt over the medium term due to structural fiscal easing, prospects of weaker GDP growth, or a sudden surge in debt and interest burdens stemming from currency depreciation are significant considerations for the rating agency. Fitch also anticipates that funding for EXPO could elevate the deficit to 1.7% by 2025.

In addition to examining a ten-year developmental horizon, evaluating the planned investment boost until 2027 and its alignment with the fiscal and debt framework in the medium term is imperative for Serbia. This investment cycle is set to kickstart through substantial public investments in various projects, including the industrial exhibition EXPO, the construction of the National Football Stadium, and numerous other initiatives.

The Economic Institute identifies potential risks, such as lingering pandemic effects, conflicts like the war in Ukraine, and current hotspots like Gaza, which could impact investments in Serbia and, consequently, public debt. It’s not only Serbia; many other nations collaborating with Serbia may feel the repercussions of these risks.

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Fitch agency acknowledges that a slowdown in the economy among key trading partners in the EU, particularly Germany and Italy, could prompt a reassessment of the country’s growth prospects and the government’s fiscal position. This, in turn, might lead to an increased public debt.

“In this simulation of impact, investors will significantly revise (reduce) their risk propensity and become more cautious when investing in other countries, which can be challenging for Serbia, as a small and open economy, in terms of financing its chosen path of economic growth and development,” states MAT.

The chosen economic path and the country’s development are determined by the planned investment plan from 2024 to 2027, including EXPO 2027. The state is securing funds not only by issuing these bonds but also through additional allocations in this year’s budget. The budget earmarks an extra 91.1 billion dinars to support realization, new borrowings, and the national stadium as a supporting facility.

Positive Outcomes Also Evident

Contrary to concerns raised by some local economists, Fitch Ratings, in its February report for Serbia, highlighted positive outcomes if the government’s plans unfold smoothly and geopolitical and domestic risks remain limited. Fitch’s deficit projections align with a declining debt trend, anticipating debt to reach 48.4% of GDP by the end of 2025.

The report predicts a continued accumulation of reserves during the planned period, with strong net inflows of foreign direct investment (FDI) expected to cover the current account deficit. Although the current account deficit is projected to widen due to imports necessary for capital costs and EXPO, it is expected to be more than offset by increased exports resulting from improved growth among key trading partners.

Another advantage of the country’s borrowing in dinars is the potential reduction in the share of foreign exchange in government debt, a point of criticism from credit rating agencies and economists alike.

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