“I don’t know where the country will borrow from, but it is very possible that it will borrow again from a wealthy country, as it did in 2022 from the United Arab Emirates. And that in itself is not bad if the borrowing conditions are better than in the markets (i.e., if the interest rate is lower) and if the loans are transparent and without hidden conditions,” says economist Branimir Jovanović from the Economic Institute in Vienna.
In 2022, Serbia borrowed one billion dollars under favorable conditions from the United Arab Emirates, with an interest rate of 3 percent, as well as 2.4 billion euros from the International Monetary Fund (IMF).
The Ministry of Finance in Belgrade did not respond to questions from the Nova Ekonomija editorial team regarding potential new borrowings, and the reason might be the anticipation of the formation of the new government of Serbia, which has been awaited since the elections in December.
Although it is clear that, based on the election results, the financial policy will continue, it remains to be seen what changes will occur with the budget rebalance once it is adopted. According to the legal deadline, the government must be formed 90 days after the constitution of the parliament.
In its budget analysis for this year, the Fiscal Council expressed concerns that the country might incur new debts, especially in a time of high interest rates. The Council believes that borrowing from international partners is a better option, as Serbia needs to allocate around 4.8 billion euros for the repayment of old debts this year alone, while 1.7 billion euros will go towards the budget deficit.
This amount represents 8.6 percent of the GDP, which is high but deemed acceptable for countries at a similar level of development, as stated in their report.
“The announcement of greater borrowing than actual needs should not be a cause for concern, considering that the Ministry of Finance typically prepares a borrowing plan for each specific channel of borrowing, which is significantly broader than the actual borrowing needs. This allows for flexibility to borrow from the source that currently provides the most favorable market conditions, which is generally considered good practice,” the Fiscal Council report states.
The problem lies in the fact that the budget announces continued high borrowing in the amount of 9.3 billion euros from various financing sources, including bonds issued both internationally and on the domestic market, as well as domestic and foreign loans, explained the Council.
“Considering that the basic interest rate of the European Central Bank has increased by over 4 percentage points in just over a year, this will significantly raise the cost of both existing and new institutional loans,” the Fiscal Council notes in the report.
Despite this fact, the rating agency Fitch, in its latest rating confirmation for Serbia last week, expects the deficit to narrow to 1.4 percent in 2024 due to “economic strengthening and gains from improved revenue collection.”
Currently, the government’s official projection for this year’s budget deficit is 2.2 percent of GDP. Rating agencies expect that financing for EXPO 2027 will increase the deficit to 1.7 percent in 2025.
“The continuous increase in the general government debt relative to GDP in the medium term, due to factors such as structural fiscal easing and/or weaker prospects for GDP growth, or a sudden increase in debt and interest burden due to currency depreciation,” are factors that Fitch agency sees as potentially negatively impacting the rating.
When looking at the budget expenditures for this year, it appears almost certain that there will be a breach of the budget framework for subsidies to road companies and allocations for social policy, and it is very possible for agricultural subsidies, according to the Council.
For members of the Fiscal Council, it would not be surprising if there were new announcements of borrowing and other measures within budget policy, as they have been “frequently announced outside official documents” in the last few months.
Since the interest rates are so high, and Serbia ranks high in Europe in terms of interest rates, it means that almost one-fifth of Serbia’s public debt (18 percent compared to the debt in 2023) will have a significantly higher interest rate than the old debt.
In the market, no one expects interest rates to decrease, at least not before the middle of this year, and some analysts believe it may not happen until the end of the year.
As seen by the Council, the challenge for the new government is to find a new source of financing but on the most favorable terms possible.
Considering that interest rates are very high in Western countries, it is one of the reasons why Jovanović believes that the new government of Serbia will seek assistance from countries in other parts of the world.
“It’s not so strange that these countries provide such loans – they have too much money from oil, practically don’t know what to do with it, so they use it for political purposes, to expand their influence, as they do with football, for example,” says Jovanović.
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