Moody’s Upgrades Serbia’s Issuer Rating
Moody’s Investors Service has upgraded the Government of Serbia’s issuer rating from B1 to Ba3. The outlook is assessed as stable. Moody’s has also raised Serbia’s long-term foreign-currency and local-currency bond and deposit ceilings.
As assessed by Moody’s, the key drivers of the upgrade are the results of fiscal consolidation, implementation of structural reforms, better than expected economic growth outlook and ensured price stability, as well as improvements in the institutional framework and progress with the EU accession process.
According to Moody’s, the successful fiscal consolidation has led to the first primary budget surplus since 2005, reversing the upward trend of the public debt to GDP ratio. The fiscal deficit reached 1.4% of GDP, far below the 4% target and the quantitative performance criterion set out in the arrangement with the IMF. Moody’s expects a gradual further reduction in fiscal imbalances and the public debt share in GDP, benefiting from improvements in tax collection and a reduction in the public wage bill as a percent of GDP, despite budgeted wage increases in a part of the public sector this year.
In terms of activities and results within the authority of the NBS, Moody’s expects that achievements in maintaining price stability will be preserved. The NBS decision to reduce the inflation target to 3±1.5% reflects improved macroeconomic fundamentals, reduced inflation expectations and stronger credibility of the monetary policy. It also expects that the anchored inflation expectations will help reduce long-term interest rates and support potential growth. As the use of the local currency has increased, low and stable inflation will continue to support a rise in the degree of dinarisation. The results of the Dinarisation Strategy implemented through combined efforts of the NBS and the Government are reflected in an increase in the share of dinar corporate and household deposits from 19.3% in 2012 to around 29% in 2016. The Moody’s also states that the measures taken under the Action Plan for Implementation of the NBS Resolution Strategy and the completion of Special Diagnostic Studies have helped contribute to stronger financial sector soundness and confidence.
Moody’s assesses that the implementation of structural reforms helps increase the resilience of the Serbian economy to shocks, noting that external vulnerability is expected to remain low. The current account deficit narrowed further in 2016, to around 4% of GDP. It is expected to decline in the years to come and to remain fully covered by FDIs. Led by investments and exports, economic growth accelerated significantly, to 2.8% in 2016. Investment growth is benefiting mainly from improvements in Serbia’s business environment (as also reflected in Serbia’s progress on the World Bank Doing Business Report), further implementation of strategically important infrastructure projects and easing of financing conditions. The growth in exports, well-diversified both in terms of products and trading partners, is underpinned by a higher FDI inflow into export-oriented sectors. Moody’s expects economic growth to accelerate further this and next year, noting that potential GDP growth, at preserved price stability, will speed up to 3.5–4%.
Moreover, Moody’s expects that labour market reforms helped raise labour participation to 65.6% in 2016. Economic recovery reflected on a significant rise in private sector employment and a drop in the unemployment rate (from 19.6% at the beginning of 2015 to 13.0% at end-2016), which is one of the lowest rates in the Western Balkans.
Other drivers of the upgrade of the issuer rating include the opening of eight negotiating chapters under the EU accession process, improved government effectiveness and regulatory quality.
Upward pressure on Serbia’s rating could arise from more favourable medium-term growth prospects, resulting from structural reforms and improvements in the investment environment, as well as faster than expected narrowing of fiscal imbalances.