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Serbia’s credit risk is lower than the rating agencies suggest

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The economy is on the mend and it is high time the raters take notice.

Serbia’s risk score has improved by more than two points on a year-on-year basis in Euromoney’s latest country risk survey, to almost 44 points out of a maximum 100 – as of Q2 2017 – the highest tally since 2010.

Climbing eight places in the global risk rankings, five in total from January to June, Serbia is 76th (out of 186 countries), and moving towards the high end of the tier-four sovereigns commensurate with a B- to BB+ rating.

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That makes it ripe for an upgrade, as presently the country is rated BB-/Ba3 by all three main credit rating agencies. Only S&P has its rating on a positive outlook; the other two are stable.

Economic fairy tale

The story is largely one of an improving economy, with all five of Serbia’s economic risk indicators upgraded by the survey’s experts.

GDP growth accelerated from 0.8% in 2015 to 2.8% last year. The IMF is predicting it will rise to 3% in 2017 and 3.5% in 2018, with a similar profile depicted by the European Commission.

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In its latest country review, the IMF says the fiscal deficit will narrow to 1.1% of GDP this year, its lowest since 2005, and public debt is falling faster than expected. The general government debt burden should fall below 70% of GDP by 2018 according to projections by the European Commission.

Unemployment is declining, investment spending is improving and the commercial banks’ non-performing loan book is diminishing.

Inflation increased this year, but it is a one-off, and is still within the central bank’s 3% +/- 1.5% target range.

Overcoming the negatives

Of course, there are still numerous problems to resolve.

The unemployment rate remains in double digits, and a labour dispute over pay and other workers’ demands at the Fiat Chrysler plant in Kragujevac – which has just been resolved – underlines the risks to exports and the current-account deficit, which remains too high.

Serbia’s future is uncertain too. There are divisions among political leaders between cosying up to Russia, on the one hand, or the EU on the other.

And then there is a large and inefficient public sector to be reformed, seen as a key issue by Marko Malovic, a professor at the Institute of Economic Sciences Belgrade, who is one of the survey contributors.

“There are huge inefficiencies and losses in public– majority or fully state-owned – enterprises,” he says.

“They include quasi-fiscal deficits hidden in the books of municipalities and other local self-governance authorities which were excluded from the picture after certain changes in public finance accounting took place a couple of years ago.”

Plus, the government has had to endure popular protests from those believing the election of the Serbian Progressive Party leader Aleksandar Vučić as president in April represented a step towards authoritarian governance.

Still, with a budget surplus in sight, and an economy improving, Serbia’s credit ratings are beginning to look quite dated.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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