Stable outlook for increasing Serbia’s credit rating

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As part of its regular activities on the rating assessment, the Standard and Poor’s agency maintained Serbia’s rating at the level of BB +, confirming the stable prospects for its further increase in the coming period, the NBS announced.
“Stable prospects for further rating upgrades have been maintained despite the increased risks caused by the COVID-19 virus pandemic thanks to a drastic increase in Serbia’s resilience compared to a decade ago,” the agency’s report said. The agency points out the increased resistance of Serbia to international shocks, thanks to significantly strengthened foreign exchange reserves and the created fiscal space during the previous half decade, which enabled a quick reaction of economic policy makers during the pandemic outbreak, NBS reports in a statement.
The report states that Serbia entered the crisis with significantly smaller imbalances compared to the previous crisis and that it was ready to respond to the latest challenges.
It is especially emphasized that a credible monetary policy was an important factor in maintaining the rating and stable prospects for its further increase.
It was also estimated that the central bank has operational independence and has kept inflation low for more than half a decade, using market monetary mechanisms.
The agency also emphasizes the importance of the measures taken by the Government and the National Bank of Serbia, by adopting a package of economic measures worth 11 percent of GDP in order to mitigate the negative effects of the pandemic.
“The reference interest rate has been reduced, banks have been provided with additional liquidity through swap lines and repo auctions, and the relative stability of the dinar against the euro and through interventions in the foreign exchange market has been preserved,” the Agency points out.
Governor Jorgovanka Tabakovic pointed out on the occasion of the decision of the Standard and Poor’s agency to keep Serbia’s rating and stable prospects for its increase to adopt a package of economic measures, which shows results in preserving employment in key sectors of the economy, which is crucial in these extraordinary circumstances.
“Despite the enormous damage the pandemic has caused to the world economy, international actors still see Serbia as a country with excellent growth prospects in the medium term, and a country that has increased its economy’s readiness to respond to all challenges from the international environment,” said Governor Jorgovanka Tabakovic.
“The last June reduction of the reference interest rate, the third since March, shows our determination to support a speedy recovery and economic growth. The results, reflected in low inflation for many years, allow us to react with interest rates and, if necessary, all other instruments coordination with all bearers of economic policy in Serbia, in order to additionally influence the more favorable conditions for financing our economy and citizens,” she stated.

In support of the fact that Serbia is now more resistant to international shocks, Standard and Poor’s states significantly less dependence on financing through short-term portfolio investments, compared to the period after the great financial crisis when the deficit was mostly financed with these funds.
It is also stated that foreign exchange reserves reached record levels, as well as that the National Bank of Serbia kept inflation below 2% in the previous six years, which is significantly lower than inflation in the period from 2003 to 2012, when inflation was higher reached a double-digit level.
Standard and Poor’s also points out that foreign direct investment in previous years was primarily directed to tradable sectors and fully covered the current account deficit, as well as reducing the need for sources of financing that increase the level of debt.
The report also points out that foreign direct investments in the industrial sector have increased inflows from exports and influenced its further diversification.
As a factor that contributes to the preservation of Serbia’s rating and the prospect of its increase, the Agency also points out the stability of the banking sector with an average capital adequacy ratio of 22.7 percent in March this year. They also note that the banking sector supported economic growth, stating that the share of problem loans in total loans was reduced to 4 percent in March, which is drastically lower compared to 22 percent in 2015.
As factors that could influence the increase of the rating in the next period, the Agency points out the continuation of inflows based on foreign direct investments, which would contribute to further increase of balance of payments resilience, further growth of inflows based on exports and increase of foreign exchange reserves, RTV reports.