Standard & Poor’s Affirms Positive Outlook for Serbia
Standard & Poor’s (S&P) has affirmed Serbia’s long-term foreign and local currency sovereign credit ratings at ‘BB’, with a positive outlook.
The positive outlook reflects Serbia’s solid economic expansion outlook, a prudent fiscal stance and the Government’s commitment to implementing the reforms supported by the policy coordination arrangement with the IMF. S&P stresses in particular the improved credibility of the NBS monetary policy and the preserved price and financial stability as the factors that lie at the core of the positive outlook.
Like in December 2018, when it made the decision to upgrade Serbia’s credit rating outlook, S&P underlines the central bank’s operational independence and the steps it has taken to augment the credibility and the effectiveness of its monetary policy in the inflation targeting regime. Adequate monetary policy decisions helped anchor inflation expectations, resulting in years-long successful preservation of low and stable inflation. As assessed by S&P, inflation will stay within the target tolerance band of 3±1.5% in the medium run. Highlighting the NBS’s success in implementing the inflation targeting regime, S&P also points out the preserved relative stability of the exchange rate. In addition to mitigating excessive short-term volatility, the exchange rate regime pursued by the NBS has helped maintain price and financial stability, while at the same time contributing to Serbia’s increased resilience to potential shocks from the international environment.
Looking at the banking sector, S&P underscores the results achieved in terms of a sustainable reduction of NPLs. Their nominal stock was slashed to 5.5% in March 2019 from 23% at the start of the implementation of the NPL Resolution Strategy, as a result of the regulatory efforts of the NBS and the Government. In the context of banking sector stability, the agency underscores excellent capital adequacy and liquidity ratios.
S&P judges Serbia’s GDP growth prospects to be sound, despite the negative impact from the softening euro area growth in the short run. Serbia’s growth is expected to continue to be led by domestic demand, supported by investment, buoyant labour market and credit growth. A positive contribution will also come from strong export growth. The potential for further acceleration of economic growth is seen in continued structural reforms and rising labour force participation, backed by the sustained EU accession process and the Policy Coordination Instrument arranged with the IMF.
S&P acknowledges a significant narrowing in internal imbalances and the Government’s longstanding commitment to fiscal consolidation, which resulted in a general government budget surplus in 2018 as well, and in a further reduction of public debt. The agency underscores that declining interest rates played an important role in the process. The share of public debt in GDP is expected to remain on a downward trajectory in the years to come.
S&P notes that Serbia also made considerable progress in reducing external imbalances, primarily owing to exports which doubled between 2010 and 2018 and will likely maintain high growth rates going forward. The agency places special emphasis on the vibrant development of the information and communication technology (ICT) industry and increasing integration of the domestic economy into global value chains. Also noted is the rise in foreign direct investment (FDI) into export-oriented sectors, underpinned by macroeconomic stability and satisfactory labour productivity and cost competitiveness of the domestic economy. Looking ahead, the net FDI inflow is expected to continue to fully finance the current account deficit and to strengthen the country’s export capacity and help maintain its external sustainability.
Based on the results achieved, S&P assesses that it could raise the rating on Serbia in the next six to twelve months if strong economic growth continues, while public debt keeps declining and external imbalances remain contained.