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March 19 (The following statement was released by the rating agency)
The decisive victory by the Serbian Progressive Party (SNS) in Serbia's parliamentary elections arguably constitutes a mandate to accelerate fiscal consolidation and structural reform in line with SNS's broad policy commitments, Fitch Ratings says. But it remains to be seen how a new government will overcome deep-rooted opposition to reform in areas such as restructuring state-owned enterprises.
SNS leader Aleksander Vucic has reiterated his pro-reform agenda and commitment to EU accession and a renewed IMF agreement. He said on Monday that he expects to pass "key laws, including the labour law, the bankruptcy law, the privatisation law... by the end of June or mid-July," according to news agency reports. Restructuring state-owned enterprises and successful implementation of other structural reforms could speed up economic recovery and narrow external imbalances, supporting Serbia's credit profile.
However, SNS was the largest party in the outgoing coalition government, which made limited progress on consolidation and reform in the face of popular and political opposition. Restructuring and privatising of SOEs has been delayed, for example, while fiscal measures such as wage and pension reform and VAT increases may not fully address the deterioration in public finances. Popular opposition to reform may persist, as voters appear to have responded to SNS's anti-corruption stance as much as its economic programme.
And despite SNS's margin of victory - it won over 48% of the vote and over 150 seats in Sunday's poll, giving it an outright parliamentary majority in the most emphatic result since the introduction of multiparty elections - Vucic has appeared to acknowledge the need for broad political support for reform. He said on Monday he will "extend a hand" to other political parties, with a view to forming a new government by 1 May.
A precautionary lending agreement with the IMF could provide a policy anchor and boost investor confidence, but this will depend on reform and consolidation commitments. Negotiations on EU accession, which began in January, could also help to sustain reform momentum.
The recent signing of a $1bn loan agreement with the United Arab Emirates may help Serbia refinance some of its most expensive debt, but Serbia remains dependent on short-term market borrowing.
We downgraded Serbia to 'B+' from 'BB-' in January to reflect the sovereign's widening budget deficit and growing debt. The Outlook on the rating is Stable.
Concluding an IMF deal, containing inflation and maintaining exchange rate stability as well as structural reform and fiscal consolidation would be credit positive.