RPT-Fitch affirms Serbia at 'BB-'; outlook negative

Fri Jul 26, 2013 12:13pm EDT

July 26 (Reuters) - Fitch Ratings has affirmed Serbia's Long-term foreign
and local currency Issuer Default Ratings (IDR) at 'BB-' with Negative Outlook.
The agency has also affirmed the Short-term foreign currency IDR at 'B' and the
Country Ceiling at 'BB-'.

KEY RATING DRIVERS

The affirmation of Serbia's sovereign ratings reflects the following factors: 

- The uncertain outlook for public finances. In 2012 the fiscal deficit rose to 
6.4% of GDP against the government's own target of 3.6%, partly due to 
pre-election spending. The government passed a supplementary budget in order to 
bring public finances under control. Nonetheless, Fitch expects the budget 
deficit to remain close to 6% of GDP in 2013 and 5% in 2014.

- Public debt is rising fast, and Fitch projects it will reach 65% of GDP by 
2014. Serbia's debt dynamics are vulnerable to an exchange rate depreciation 
shock as 81.5% of public debt is denominated in foreign currency thereby 
reducing Serbia's debt tolerance.

- Fragile economic recovery; Fitch expects the current account deficit to narrow
to 7.1% of GDP at end-2013 helped by stronger export performance. Real GDP 
contracted 1.6% in 2012 and Fitch forecasts slow growth of 2% for this year and 
over the medium term. Projections are however highly dependent on the automobile
sector. 

- The government has announced an ambitious restructuring plan regarding 
state-owned enterprises (SOE) and public sector entities, which is funded. 
However, Fitch notes that the government has yet to demonstrate the political 
resolve necessary to implement unpopular structural reforms, while no progress 
has been yet made on a comprehensive pension system reform.

- Negotiations between the Serbian authorities and the IMF to sign a 
Stand-By-Agreement (SBA) remain inconclusive. Fitch believes that a 
precautionary arrangement would promote investor confidence and guard against a 
reignition of global risk aversion or a material re-assessment of country 
specific risks. 

- While the authorities operate a flexible exchange rate regime, interventions 
by the National Bank of Serbia (NBS) to stem depreciation pressures on the dinar
have continued. As a result, official reserves at end-2012 were 8% lower yoy at 
USD14.4bn. NBS has gradually raised private banks' RSD reserve requirement to 
further contain dinar depreciation. Falling inflation in early 2013 has allowed 
it to end a series of interest rate hikes, cutting the policy rate to 11%. 

- Serbia's rating is supported by its high income per head, superior human 
development and ease of doing business indicators relative to rating peers and 
recent EU decision to open accession talks with Serbia.

RATING SENSITIVITIES

The Negative Outlook reflects the following risk factors that may, individually 
or collectively, result in a downgrade of the ratings:

- Failure to implement sufficient fiscal consolidation to put public debt on a 
sustainable path

- A recurrence of balance of payments pressures leading to a fall in reserves 
and a sharp fall in the exchange rate

- An intensification of the eurozone crisis which has a significant impact on 
the Serbian economy through trade and financial channels

The current rating Outlook is Negative. Consequently, Fitch's sensitivity 
analysis does not currently anticipate developments with a material likelihood 
of leading to a rating upgrade. However, future developments that may, 
individually or collectively, lead to a stabilisation of the Outlook include:-

- Credible medium term fiscal consolidation programme that stabilises public 
debt/GDP

- Progress on structural reforms that lead to an acceleration of economic 
recovery and a narrowing of external imbalances

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions. 

Fitch assumes that the government's supplementary budget passed in 2013 will 
promote further fiscal consolidation.

Fitch assumes that the Serbian economy grows at a rate of 2% per annum over the 
medium term and that the external finances are not subject to a severe exchange 
rate shock.

Fitch assumes that the US Federal Reserve exit from monetary stimulus is orderly
but given the uncertain process it is likely to generate periodic bouts of 
market volatility. Fitch assumes that Serbia retains domestic and external 
market access despite higher international financial volatility.

Fitch assumes that there is no repetition of the policy hiatus that followed the
presidential and parliamentary elections in 2012.

Contact: 

Primary Analyst

Spyros Michas

Director

+44 20 3530 1121

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst

Charles Seville

Director

+44 20 3530 1048

Committee Chairperson

Shelly Shetty

Senior Director

+1 212 908 0324

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable criteria, 'Sovereign Rating Methodology' dated 13 August 2012, are 
available at www.fitchratings.com.

Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
here. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
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AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
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SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS 
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED 
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH 
WEBSITE.

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