Three years after its last deal with the International Monetary Fund (IMF) was suspended because of its budget waste, Serbia finally has a new $ 1.2 billion.
That should be the hard part, and investors are waiting for all the details of the promised reforms. Nonetheless, the Serbian government has repeatedly expressed its determination and some of the assets for sale are likely to generate international interest.
The IMF Executive Board approved the Triennial Preventive Stand-By Arrangement (SBA) on February 23, announcing that the program had three main objectives: fiscal consolidation, strengthening the financial sector, and increasing competitiveness and growth through structural reforms.
From a statement by David Lipton, the Fund’s first assistant manager:
“The Serbian economy is facing severe fiscal imbalances and entrenched structural weaknesses in the context of slower growth and adverse regional spillover effects. The authorities’ program, supported by the Fund, provides an opportunity to restore public debt sustainability, rebalance macroeconomic policies, strengthen financial sector resilience and improve competitiveness and medium-term growth potential. “
Last year, Serbia recorded the largest consolidated budget deficit in Europe at 6.6 percent of GDP (the consolidated figure was probably even higher), while debt exceeded 70 percent, well above the theoretical legal limit of 45 percent.
Serbia’s latest IMF deal, a $ 1bn SBA, the current administration says it is picking up the pieces.
The IMF praised government reforms over the past year, including labor and pension laws, and its ownership of budget cuts. While some felt this was not yet as far-reaching as hoped, the Fund endorsed the target of reducing the debt ratio by 2017 and called for the usual calls for “improving the framework for public finance management”.
As in many other countries in the region, Serbia has seen an increase in the non-performing loan ratio in recent years, and the Fund welcomed the government’s commitment to design and policy.
It stated that the pressures on the economy by tightening fiscal policy could be offset by easing monetary policy, a path the central bank has already taken as inflationary pressures have eased. The country is also benefiting from exchange rate flexibility, added Lipton – although the dinar’s weakness has caused some concerns in recent years.
While the IMF’s comments were bullish, investors will be interested in a clearer roadmap for the Fund’s three objectives – consolidation, fiscal stabilization and reform.
“The confirmation of the precautionary agreement by the IMF is positive in the short term, especially with regard to offsetting the EUR / RSD upward pressure,” Ivana Kovacic, analyst at Hypo Alpe Adria, told beyondbrics.
“However, we believe that the IMF wants the sovereign to go the way and not just talk the talk. From our point of view, closing the deal was “the easier” step. The challenge is to keep the deal going for the next three years and get serious about any necessary consolidation measures. In that regard, we are waiting for the IMF’s Article IV consultation to see all the austerity measures the Fund would like to see. “
Significantly, the Fund’s opinion emphasizes the importance of restructuring state-owned enterprises both as a means of reducing budgetary pressures and as a structural reform measure. The government has drawn up a list of more than 500 companies to be privatized and in November Economy Minister Zeljko Sertic told beyondbrics that the program was on the right track and was attracting great international interest.
Kovacic says this process has “not been going as smoothly as planned so far”.
“We are skeptical of the country’s plan to complete the restructuring of state-owned companies this year, taking into account sensitive issues (such as optimizing the number of employees), and therefore see the risks that arise from this.”
Some in Serbia fear that the layoffs in the public sector, likely resulting from privatization and restructuring, could lead to protests such as those that have seen across south-eastern Europe in recent years. However, Milan Parivodic, a former economic minister who is now acting as an adviser to investors in Serbia, says small demonstrations that have surfaced are unlikely to snow.
Parivodic informed beyondbrics that Sertic had assured him that privatizations would take place.
“The government has every interest in promoting privatization one way or another,” said Parivodic. “Serbia is simply unable to extend this process, it must be completed, the government is determined to implement this, and I understand that the IMF has recognized this intention with the credit confirmation.”
Telco Telekom Srbija and pharmaceutical company Galenika are likely to be among the more attractive assets on the block, while Prime Minister Aleksandar Vucic has mobilized Chinese interest in engine and tractor manufacturers. Other assets are likely to be less attractive.
“There could be interest from European, American, Chinese or Indian investors, but Russia is too consumed by its own turmoil,” said Parivodic. “The advantage is that Serbia offers duty-free access to a huge market with hundreds of millions of people, mainly in the EU, but also in Russia, EFTA and Turkey, as well as regional markets. The skilled workers are also very important. Risks arise mainly from bureaucracy. “
Serbs and investors alike are now waiting for the government to take the next steps.
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