The rating agency S&P raised the credit rating of the Republic of Serbia to the level of BB, with the stable outlook for improving the credit rating.
According to the S&P the Serbian economy is likely to expand in 2018-2020, on the back of healthy investment inflows - mainly foreign direct investment (FDI) and stronger private sector consumption supported by expanding employment, wage growth, and a stable inflow of worker remittances.
S&P claims that steady economic performance will solidify the government's multiyear fiscal effort, with significant budget overperformance again this year and a 2018 draft budget implying a deficit of just 0.6% of GDP. Despite expected moderate hikes in public sector wages in 2018, the average fiscal deficit is estimated at about 1.5% on average over 2017-2020 compared with 2.9%-3% of GDP what was expected a year ago. The agency could raise its rating if the government overperforms on its fiscal metrics while decreasing the government debt below the expectations.
As stated by the S&P, under a standby agreement with the IMF, the Republic of Serbia has made significant progress in keeping the public wage and pension bill under control and containing subsidies to SOEs. This resulted in an impressive expenditure-side adjustment of around 4% of GDP between 2014 and 2017. General government deficits shrank to an estimated 1% of GDP in 2017 from 6.6% of GDP in 2014. The agency also estimates that the current account deficit, which amounted to 8.7% of GDP in the period from 2011 to 2014, will be on average at the level of 4.1% in the period 2017-2020. What will contribute the most are the existing FDI and the improved competitiveness of products and services.
In addition to declining current account deficits, this rating agency expects the composition of external financing to improve. It is expected that FDI net inflows will continue to fully finance the current account deficits throughout our 12-month forecast horizon.