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We visited Belgrade last week, where we met with the local representatives of the IMF, European Union, European Bank for Reconstruction and Development, Central Bank, Finance Ministry, Fiscal Council and local journalists. We believe the government will ultimately have to sign an IMF deal as its macroeconomic imbalances are far too great for it to go it alone. But before then, we expect to see heightened political uncertainty, which will weigh on the sovereign credit. Things will get worse before they get better. Establish underweight Serbia USD 21s vs. Slovenia USD 22s.
The economy has enjoyed a bounce back in the first half of the year. But this has almost entirely been based on exports from a single manufacturing company and agricultural base effects. The contraction in private consumption is likely to continue this year and next as real wages and employment levels fall further. We expect growth to be capped at 2% in 2013 and 2014.
Balance of payment dynamics are poor, with the current account deficit at ~8% of GDP, with minimal coverage from FDI inflows and heavy reliance on portfolio inflows. Current market conditions leave Serbia vulnerable. But the central bank's substantial FX reserves give us some comfort and their active presence in the FX market make long RSD vs. EUR an attractive trade, particularly given the ~9% carry. But that's one for the brave.
The government's target of reducing the budget deficit from 6.4% of GDP last year to 3.6% this year is already out of the window. A new supplementary budget now targets a general government budget deficit of 5.2%. Risks are skewed towards further fiscal slippage given optimistic growth assumptions and reliance on various cost savings at numerous ministerial levels.
Calling the rest of the USD 24s is off the table in our view. The government's financing conditions are looking tight and fiscal reserves have dwindled after heavy redemptions in May. The government is relying on a further USD 1bn of issuance in the external market and USD 1.3bn of issuance in local market. USD 300mn from Russia, USD 200mn from the World Bank and USD 400mn of project loans will also be needed.
IMF deal will eventually have to be signed. Serbia's macroeconomic imbalances are far too great for it to go it alone. Nothing will happen, however, in the next few months due to logistical factors and summer holidays.
After the EU decision on whether or not to grant Serbia a date for the start of accession talks, attentions will be re-focused to internal matters, particularly the politics. A government re-shuffle will be the least of the political instability that is on the horizon. Full coalition break-up and early elections cannot be ruled out.
Trade idea: There is not much room for good news over next 2 months. Establish underweight Serbia USD 21s vs. Slovenia USD 22s.
Related News in English
Povezane vesti na srpskom
Συναφείς Ειδήσεις στα Ελληνικά