International rating agency Standard & Poor’s revised the outlook of Serbia from stable to positive and affirmed the long-term foreign and local currency ratings of the country at ‘BB-' and the short-term ones at ‘B’. The agency noted that the outlook revision reflects the fiscal consolidation initiated by the cabinet, which contributed for reduction of the government debt, the good macroeconomic prospects as well as the reform program of the cabinet and the EU integration – in particular the progress in the talks on the conclusion of a Stabilization and Association Agreement).
As expected, S&P’s also noted the successful completion of the 3-year extended arrangement with IMF and the subsequent 15% debt write-off by the Paris Club of creditors. The fiscal tightening in 2005, which resulted in 1.6% budget surplus last year and the plans of the government to continue with cautious fiscal policies in the future will contribute for reduction of the general government debt to 40% this year from 45% in 2005. Still, upgrade of Serbian rating is constrained by the high CA deficit and the strong acceleration of inflation. However, S&P’s remains optimistic about future macroeconomic situation and projects slowdown of inflation to 8% by 2008 and considerable FDI inflows, which will finance the CA gap (projected at 8% in the medium term). Noteworthy, the agency noted the possibility for upgrade of the rating of the country in the next 18 months in case there is no fiscal loosening and considerable increase in political risks (in particular with regard to the talks on the future status of Kosovo and poor ICTY cooperation).
IntelliNews comment: The outlook’s revision by S&P’s is hardly surprising and reflects the significant improvement of indicators for external indebtedness of the country last year. The CA gap was reduced by 4.1pps year over year to 8.6% of GDP according to preliminary figures of the central bank with the improvement coming mostly from the strong growth in exports. At the same time FDI inflows rose strongly in 2005 (boosted by the successful privatization of the banking sector) and covered 71% of last year’s CA deficit (only 34% in 2004). Most importantly, the state union managed to complete the three-year deal with the IMF and thus its debt towards the Paris Club was reduced by some US$700 million.
Thus despite some macroeconomic issues that still have to be tackled (in particular the high inflation), the major constraint for the ratings remain the political situation with the uncertainty in the talks on the future status of Kosovo and the possibility for disruption of SAA talks because of the inability of Belgrade officials to deliver former Bosnian Serb general Ratko Mladic to the ICTY. However, in case SAA negotiations are completed in the autumn, we believe that there can be one notch upgrade of Serbian rating already by the end of this year in case there is not significant worsening in the trade and CA deficits.