Navigating Challenges: Serbia's Economic Outlook and Policy Choices
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The Stand-By-Arrangement (SBA) with the IMF concluded in late 2022 seems to have been an inspired policy choice, as it fostered better-than-expected twin deficits, while foreign direct investments remained strong. In this context and underpinned by stable ratings, Serbia successfully retuned to capital markets, issuing two Eurobonds in early 2023.
It is not all rosy though, as relatively sound economic policies overlap major other challenges.
In May 2023, the European Parliament voted with a large majority to validate a report which clearly states, among others, that Serbia’s EU integration should be dependent on aligning with the EU on sanctions against Russia and on normalising the relations with Kosovo. At the limit, this could mean a limbo-time for Serbia until policymakers are ready to take decisive actions on most sensitive issues.
Forecast summary
Real GDP (%YoY) and contributions (ppt)
From hero to almost zero
The economy has been losing speed for a while as the growth pace gradually decelerated from double digits in mid-2021 to marginal advances in 4Q22 and 1Q23. The growth structure has been changing as well, as private consumption has begun to fade lately, after more than one year of real negative wage growth. With investments and net exports only partially offsetting the slower growth in consumption, we maintain a below consensus 1.6% GDP growth estimate for 2023.
Geopolitics aside, we tend to see risks skewed to the upside, as Serbia’s main trading partners should recover in 2H23 boosting exports. On the domestic front, doubledigit wage growth will provide a backstop to slowing consumption while public investments are set to remain close to historical highs.
FX stability remains the main policy tool
No deviation from the tight managed floating policy
After raising the policy rate by 525bp to 6.25% in a bit more than one year, the NBS might be taking its time now and contemplate the effects of past monetary tightening. We believe that the next policy decision will be a rate cut in 1Q24 when we will finally have positive real rates.
However, despite the inflation peak being clearly behind, our central scenario does not envisage the headline inflation back within NBS’s 1.5-4.5% target range over the next two years, but rather a stabilisation in the 5.00-6.00% interval.
We maintain our expectations for an essentially flat EUR/RSD profile for the rest of 2023 and even through 2024, with FX interventions likely to occur in a rather narrow range around the 117.30 level.
SERBIA EUR credit vs ROMANI (z-spread, bp)
SERBIA credit:
Geopolitics drives headline risk The recent flare up in Kosovo tensions (violent protests and calls for new regional elections) has opened up value for Serbia’s Eurobonds - headline noise is likely to continue but should be contained by US and EU mediation.
At the same time, credit fundamentals are recovering well from last year’s energy shock, with a steady accumulation of FX reserves, narrowing current account deficit and government debt-to-GDP back on a downward trend. IMF support should also act as a policy anchor even if progress towards EU integration is slow
