Moody s Ba3 / S&P BB- / Fitch BB- 1 Economy: Agriculture 10%, Industry 41%, Services 49%

Transcription

1 Serbia Summary Moody s Ba3 / S&P BB- / Fitch BB- 1 Economy: Agriculture 10%, Industry 41%, Services 49% Serbia s well-managed economy weathered the global financial crisis and recent European uncertainty, and the country s prospects for accession to the EU are favorable, as is potential convergence to developed Europe s income levels. Aleksandar Vucic, who had served as Prime Minister since 2014, consolidated power after his election as President in April Vucic s Serbian Progressive Party (SNS) has a majority in parliament, and the President enjoys strong approval ratings which should reinforce the government s commitment to reforms. Authorities have consistently reduced the fiscal deficit since 2014, and fiscal discipline is expected to stem the recent rise in public debt. Serbia also reengaged with the IMF in 2015 and the IMF recently approved a review of the country s standby arrangement. Serbia s relationships with Russia, China, and the United Arab Emirates have led to increased financing. Serbia s principal challenges include high levels of public and external debt, sluggish growth, elevated levels of nonperforming loans, and inefficient public companies that represent a major cost for the government. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 6,367 6,210 5,253 5,440 5,342 5,522 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Bloomberg, Haver Analytics, IMF, National Bank of Serbia, Statistical Office of the Republic of Serbia 241

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency BB+ Local Currency BB+ BB BB BB- BB- B+ B+ B B Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Serbia 2010 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 242

3 Serbia Strengths Commitment to EU Accession Serbia has delivered on the EU s required promise to normalize relations with Kosovo, and the first round of EU membership negotiations began in January Despite a politically charged environment, there is consensus across the political spectrum to enact the policies necessary for EU accession. Entry into the EU will take several years, but the process will spur numerous reforms and legislative changes that should encourage foreign direct investment (FDI) and improve the business climate. A progress report published by the European Commission in November 2016 stated that discussions are moving according to plan; Serbia has largely met the political criteria; and the country is moderately prepared in terms of its capacity to cope with competitive pressure and market forces within the EU. 2 Potential for Convergence Serbia is a small, open economy whose transition to a full-market economy is not nearly as advanced as some of its peers like Bulgaria and Romania. However, Serbia has potential because the country s GDP per capita is low, wages are among the lowest in the region, and the workforce is well educated. Large parts of the economy are still state-owned but are in the process of being privatized, albeit slowly, including large industrial companies and companies in the telecommunications and energy sectors. The economy is reasonably diversified, with a mix of heavy and light industry, textiles, oil refining, chemical processing, and agriculture and food processing. Serbia s poor business environment, macro imbalances, and cyclical headwinds have slowed the pace of EU convergence, but the government s commitment to reforms and steady progress is expected to ultimately bring Serbia in line with the rest of the EU. Access to Bilateral Funds Serbia maintains close ties to Russia, China, and, more recently, the UAE. These countries have provided significant budget and investment financing and are likely to continue supporting Serbia. The UAE, which has become a significant investor in Serbia, holds a 49% stake in Air Serbia and has committed to several additional projects, including a multibillion euro deal for a waterfront development project in Belgrade. Most importantly, the UAE extended a US$1.0 billion loan to Serbia in 2016 that covered a portion of the country s financing needs at a 2.25% interest rate. 3 Consolidation of Political Power and Prospects for Reform A presidential election was held in April 2017 and Prime Minister Aleksandar Vucic was elected with 55.1% of the vote. One year earlier, then-prime Minister Vucic called snap parliamentary elections (two years ahead of schedule), and his center-right SNS party lost 39 seats but maintained its majority with 52.4% of the legislative seats. With the support of two smaller parties, Vucic retains control of two-thirds of the Serbian parliament, and his presidential mandate gave him the authority to undertake a number of measures, including a labor reform that raised the retirement age and increased the penalty for early retirement. The most recent election gave the government the mandate to continue the reforms agreed to with the IMF, including sweeping privatizations and continued fiscal consolidation. 243

4 Lazard Emerging Markets Debt Weaknesses Poor Growth Prospects After briefly emerging from recession in 2013, heavy floods in May 2014 pushed the economy back into recession, and economic growth was essentially flat in Economic activity rebounded in 2016 and 2017, and is expected to stabilize over the forecast horizon, thanks to close adherence to an IMF Standby Agreement since However, growth is challenged by several factors, including the fiscal consolidation as part of the IMF agreement, low levels of investment, and sluggish growth among Serbia s trade partners, including Central and Eastern Europe and the EU. Serbia s long-term growth prospects also face significant challenges posed by an aging and outright declining population, high levels of corruption, weak competition policies, and large infrastructure gaps. These factors are contributing to the slow pace of structural reforms. The growth model favored by government officials depends on switching from domestic demand-led growth to activity fueled by net exports in order to better integrate into the core European production chain (similar to Poland and Hungary). Even in a best-case scenario, this reorientation of economic activity will take time, although exports are now growing faster than imports, thanks in part to extensive investments in Serbia s automotive sector in recent years. Elevated Debt Levels despite an Improving Fiscal Balance Serbia s fiscal balance has improved substantially, but additional progress is needed. The fiscal deficit fell to 1.3% of GDP in 2016 from 3.7% in 2015, and over the forecast horizon, the budget shortfall is expected to gradually improve further. Revenue collection has improved in recent years, thanks to a series of tax measures adopted in mid-2015, and a reduction in capital expenditures and public-sector wages and pensions have further improved the fiscal balance. 4 Despite this fiscal improvement, Serbia s debt ratios remain elevated, with public-sector debt amounting to nearly 70% of GDP, up from about 60% in The government is aiming to reduce the debt ratio over the forecast horizon, which could be achieved considering the progress in lowering the fiscal deficit. However, the debt trajectory will also depend on exchange-rate developments, since public and private-sector external debt amounts to about 75% of GDP, and more than 60% of Serbia s public debt is denominated in foreign currencies. On the external side, Serbia s low national savings rate of less than 15% of GDP is contributing to a large structural current account deficit. This imbalance is improving, thanks to rising automotive exports since the opening of a Fiat production facility in mid-2013, as well as a contraction of imports owing to sluggish economic growth. The current account deficit is projected to decline to about 4.5% of GDP in the coming years from double-digit levels five or six years ago. Auspiciously, FDI has been rising recently and is projected to fully finance the current account deficit in the coming years. 244

5 Serbia High Levels of Nonperforming Loans Nonperforming loans (NPLs) in Serbia rose rapidly between 2009 and 2015, due to currency depreciation, high inflation, and heightened unemployment. NPLs peaked at 22.8% of total assets in mid-2015 but have fallen about 7% since then. The improvement occurred mainly among foreign-owned banks, while NPLs have fallen more slowly among Serbian banks. Nevertheless, NPLs have fallen sharply among both private and public banks since the second half of Aided by the IMF and the European Bank for Reconstruction and Development, the government is implementing a comprehensive strategy to resolve persistently high NPL levels via enhanced supervisory oversight, improved valuation of banks real estate collateral, reforms of bankruptcy laws, the elimination of obstacles to the sale of NPLs, and tax reforms that will encourage write-offs and enable banks to repair their balance sheets. 6 Although these actions are encouraging, continued effort is required to reduce this source of banking system stress. Large and Inefficient Publicly Owned Companies A large number of inefficient state-owned companies represent substantial fiscal costs to the Serbian government. At the end of 2014, the country had more than 1,400 state-owned enterprises (SOEs) with over 250,000 employees, and the direct fiscal cost of these entities amounted to more than 2% of GDP. The government has made significant progress in privatizing or shuttering many of these inefficient entities, as well as identifying and restructuring strategic enterprises. By June 2017, more than 275 companies had entered bankruptcy proceedings and more than 45 were privatized. About 26,000 employees of approximately 320 companies had been laid off. Despite this progress, Serbia still has about 150 SOEs employing 52,000 people that have been targeted for privatization or closure

6 Lazard Emerging Markets Debt Country Background Size 77,474 KM 2 (118th) Capital Belgrade Population 7.1 Million Religion Orthodox 84.6%, Catholic 5.0%, Muslim 3.1%, Protestant 1.0%, Atheist 1.1%, Other 5.2% Median Age 42.6 Years Literacy Rate 98.8% Independence 5 June 2006 Political System Parliamentary Republic Government Leadership President Aleksandar Vucic; Prime Minister Ana Brnabic Next Election 2022 Legislative Branch Unicameral National Assembly Economy Agriculture 9.9%, Industry 41.2%, Services 48.9% Labor Force Agriculture 17.8%, Industry 25.6%, Services 56.6% Merchandise Exports Automobiles, Iron and Steel, Rubber, Clothes, Wheat, Fruit and Vegetables, Nonferrous Metals, Electric Appliances, Metal Products, Weapons and Ammunition Export Partners Italy 14.6%, Germany 13.1%, Bosnia and Herzegovina 8.3%, Romania 5.7%, Russia 5.4% Currency Serbian Dinar (RSD) As of November 2017 Source: CIA 246

7 Serbia Country Timeline 1987 Senior Serbian Communist Party official Slobodan Milosevic visits Kosovo, tells Serbs protesting against alleged harassment by majority Albanian community that no one would ever be allowed to beat them. The speech comes to be seen as a rallying cry for Serb nationalism Slobodan Milosevic becomes President of Serbia Montenegro and Serbia form Federal Republic of Yugoslavia. Rising nationalist and independence aspirations bring bloody conflict with Croats and Bosnian Muslims. The UN imposes sanctions on Federal Republic of Yugoslavia Dayton accords bring end to Bosnian war. Sanctions lifted Milosevic becomes Yugoslav president Defiance by Milosevic over Kosovo sparks NATO air strikes against Serbian targets. Milosevic agrees to withdraw forces from Kosovo. Kosovo becomes UN protectorate but remains de jure part of Serbia Milosevic accused of rigging presidential election win against Vojislav Kostunica. Mass street demonstrations ensue. Protesters storm parliament. Milosevic quits. Mr Kostunica sworn in as president. Federal Republic of Yugoslavia joins the UN Ibrahim Rugova becomes president of Kosovo following success for his moderate Democratic League in the first such election ever held in the region Trial of Slobodan Milosevic on charges of genocide and war crimes begins in The Hague. All 45 deputies belonging to Yugoslav President Vojislav Kostunica s Democratic Party of Serbia walk out of Serbian parliament in continuing rift with Serbian PM Djindjic His term as Serbian president at an end, Milan Milutinovic surrenders to the Hague tribunal where he pleads not guilty to charges of crimes against humanity. Serbian and Montenegrin parliaments approve constitutional charter for Union of Serbia and Montengro. Serbian Prime Minister Zoran Djindjic assassinated in Belgrade Democratic Party leader Boris Tadic elected Serbian president, defeating nationalist Tomislav Nikolic in run-off. Mr Tadic pledges to steer Serbia towards the EU Union of Serbia and Montenegro begins talks on a Stabilisation and Association Agreement with the EU, regarded as a preliminary step on the long road to membership EU calls off talks on closer ties because of Belgrade s failure to arrest war crimes suspect Ratko Mladic. Montenegro declares independence. Serbia responds by declaring itself independent sovereign successor state to Union of Serbia and Montenegro UN envoy Martti Ahtisaari unveils a plan to set Kosovo on a path to independence, which is immediately welcomed by Kosovo Albanians and rejected by Serbia UN-administered Kosovo declares itself independent. Serbia says declaration illegal. Following disagreements between coalition partners over policy towards EU in the wake of Kosovo's independence declaration, President Tadic accepts Prime Minister Kostunica's request for early elections. EU foreign ministers sign a long-delayed pact on closer ties with Serbia, seen as a first step towards eventual Serbian membership of the EU International Monetary Fund (IMF) agrees to lend Serbia 3bn euros ( 2.8bn) to help it weather economic downturn. Russia grants Serbia a 1bn euro ( 0.9bn) loan to help it cover its budget deficit The European Commission recommends Serbia for EU candidate status but says talks can only start after it normalizes ties with Kosovo Following the signing of a landmark agreement between Serbia and Kosovo on normalising their relations, the European Commission gives the green light to the opening of Serbia's EU membership talks New center-right government under Prime Minister Aleksandar Vucic promises radical economic reform and a commitment to EU membership. 247

8 Lazard Emerging Markets Debt 2016 Aleksandar Vucic's Progressive Party wins comfortable majority at early parliamentary elections, giving the prime minister a fresh mandate to push through reforms required for EU membership Prime Minister Aleksandar Vucic wins the presidency for the pro-eu Progressive Party, takes office at the end of May. Source: BBC Notes 1 As of October 17, Serbia 2016 Report, European Commission, November 2016, 3 Vujovic: We have obtained $1 billion loan from UAE, Serbianmonitor.com, October 26, 2016, 4 Republic of Serbia: 2017 Article IV Consultation, Seventh Review Under the Stand-by Arrangement and Modification of Performance Criteria, International Monetary Fund, IMF Country Report No. 17/263, September 2017, 5 Ibid. 6 Ibid. 7 Ibid. 248

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