For a country with extremely low GDP and whose annual foreign trade deficit does not fall below six billion euros, 28.2 billion euros of public debt is a great temptation, and 32 billion euros of foreign debt is even higher.
These days, it has been announced that after the first six months, the budget deficit of Serbia is only 635 million euros instead of the planned 1.4 billion euros. So, we saved 800 million euros and it would be expected that the Minister of Finance, Sinisa Mali, would be overjoyed. Especially since he announced the repayment of the last installment of the most expensive loan for September, which Mirko Cvetković’s team took out at the end of 2011 and left at the expense of future governments.
Let us remind you, this is a billion dollar loan for ten years with 7.5 percent annual interest. Obviously, the doors of financial markets are open to Serbia and it can easily sell its own securities with today’s usual yield of about two percent. With the obtained money, he can return the last installment and replace the inherited debt with a loan that is much less petrified.
Program for 15 billion euros
However, the minister is nervous and sharply responds to the critics of certain development programs of the current government in the media. First of all, those who point to intensive foreign borrowing. As “Western” bankers are increasingly setting harsh environmental, social and economic conditions in order to finance certain development programs in Serbia, the current government has turned to Chinese capital.
The cooperation program between the two countries in the period from 2021 to 2025, which Mali presented to the Chinese ambassador to Serbia, envisages an enormous participation of banks and companies from China as financiers, equipment suppliers, and often contractors. While so far companies from the most populous country are mainly engaged in the construction of roads, bridges, tunnels, power plants, this time the emphasis would be on digitalization, landfill construction, wastewater management, and ecology through the construction of communal infrastructure and would cover almost all segments of society including culture, security, justice, etc.
The trap of cheap capital
It is especially striking that in the mentioned period, in the case of maximum realization, Serbia would borrow as much as 15 billion euros from China alone, and in a more realistic variant, seven billion euros. For the sake of comparison, Serbia now owes the largest country 1.1 billion euros.
The arrangement is all the more unusual because we have a pronounced imbalance in exchange with China. We import goods and services worth 3.1 billion euros per season, while our exports barely exceed 300 million euros. The recent case of the construction of the first stage of the Bar-Boljare highway in Montenegro clearly shows what problems arise when it comes time to repay the debt, especially among countries with a huge imbalance in trade.
It is not disputed that economically backward Serbia needs strong development. It is difficult to dispute that no more is being built during the current government, and more than during the previous ones. Quite a long period, at least 13 years since the previous last financial crisis, the price of capital in the world is unusually low. The last two governments saw the situation as an opportunity and decided on significant investments based almost exclusively on foreign currency.
Domestic companies cut off
The state grants unusually high subsidies to private foreign investors, putting them in a privileged position vis-Ã -vis Serbian investors. Insufficient environmental protection programs and poor working conditions are often squinted at. Jobs are contracted in direct talks, so there is no market competition as a mechanism for checking the reality of the agreed job price.
As far as public and additional trouble of current and planned public investments is concerned, there is a small share of domestic companies. Many things for which the local engineers, masters and workers are more than well trained, were paid to foreign companies. Practically, what we could pay in dinars, we will pay in euros or dollars, and so we additionally, completely unnecessarily, increased the foreign currency debt.
The case of SFR Yugoslavia
In short, investment development in Serbia is designed to be predominantly based on foreign capital. It works while interest rates on the financial market are low, and they have been at a historically record low level for years.
Problems arise when interest rates start to rise. We remember the end of the eighties of the last century and the former SFR Yugoslavia. The growth of interest rates, along with the growth of the dollar against other currencies, led to the debt of the former state of nine billion dollars in 1979 reaching almost 20 billion dollars in three years, without taking a single dollar of new debt. In the later period, until the breakup, Yugoslavia paid about 17 billion dollars, and reduced the debt by only 1.5 billion. It all went to interest.
We also came to the mood of Minister Sinisa Mali. How to rejoice when the June inflation in the USA is as high as 5.6 percent and when further price growth is almost impossible to curb without an increase in interest rates. When the Fed, a kind of central bank of the most powerful country in the world, starts raising interest rates, other financial markets follow the same trend. Yields are skyrocketing, reaching 13 percent in the 1980s and then 17 percent, despite a regulation that treated interest rates above 11 per cent as greening.
Reliance on foreign loans
Trouble is not visible while interest rates are low. Even for Serbia, whose exports reach only 18 and the import 24 billion euros a year, it is not a problem to pay around 950 million euros on interest. The foreign trade deficit of about six billion equals with 3.2 billion euros in remittances from Serbian guest workers and foreign investments in approximately the same amount. The head returns the incoming installments with new borrowing at a low interest rate. Business goes on while borrowing capital is cheap.
However, troubles arise, and then accelerate rapidly, with rising interest rates. Investors are quickly giving up on further investments in an underdeveloped and insecure country (they are turning to the stock market where the price of credit has jumped and is constantly growing). Very quickly, the amount of our annual interest, even if we do not take a single dollar of new debt, would exceed three, probably four billion euros. Of course, foreign investments are more than halved in such cases, in some seasons they are almost completely absent, and then our foreign trade deficit would quickly exceed 10, 12, and even billions of euros.
Since the last world crisis, Serbia has developed almost exclusively on borrowed money. Such an orientation brings more visible results in a shorter period of time than in the case of equal reliance on foreign and domestic capital. The problem is that the economic future of such a country largely depends on global financial flows and is in the hands of foreign creditors, perhaps more than in the power of legally elected domestic authorities, 021 reports.
