Moody’s Upgrades Serbia’s Rating to Ba2, Outlook stable

In 2021, Moody’s expects for the real GDP of Serbia to expand by 4.7%

The key drivers of the decision to upgrade Serbia’s ratings are:

Serbia’s relative economic resilience to the coronavirus shock and the country’s solid medium term growth prospects.

After averaging 4.4% in 2018-19, real GDP contracted by a preliminary 1.0% in 2020 due to the impact of the coronavirus shock. This contraction compares well with regional and rating peers, reflecting a robust economic momentum at the onset of the pandemic and the fiscal space created in recent years that allowed the implementation of a comprehensive fiscal response. Moreover, the structure of the economy adds to Serbia’s resilience, including the relatively low reliance on sectors particularly affected by the pandemic such as tourism and the favourable performance of the agriculture sector.

Moody’s expects that growth will resume in 2021, with real GDP expanding by 4.7%, driven by the recovery in domestic demand supported by the normalization of economic activity on the back of a relatively rapid vaccination rollout and significant public investment. The recovery will also be supported by additional fiscal measures that have recently been announced.

Moody’s expectation that Serbia’s fiscal metrics will continue to outperform Ba peers over the next few years, with fiscal prudence being anchored by the continuation of reforms to strengthen the fiscal framework.

The second driver is underpinned by Moody’s expectation that Serbia’s fiscal metrics, despite deteriorating, will continue to outperform many Ba peers over the next few years. The substantial fiscal consolidation pursued in recent years has afforded Serbia with fiscal space to respond to the coronavirus pandemic. Despite the large fiscal response to the crisis, the fiscal metrics have deteriorated less than most Ba peers and the debt-to-GDP ratio is projected to resume its downward trajectory in 2022.

The fiscal package implemented by the authorities was the largest in the region, at around 12.5% of GDP in 2020. This, along with the economic contraction, led to a deficit of about 8% of GDP and an increase of the general government debt to GDP to about 58% of GDP in 2020 from 52.9% in 2019, while remaining below the median of Ba peers (estimated at 63% of GDP as of 2020).

The stable outlook balances Moody’s expectations that Serbia’s economy will return to growth this year and that the government debt-to-GDP will start declining in 2022 against the risks posed to the debt trajectory by the potential crystallization of contingent liabilities from SOEs and guarantee schemes, which are expected to remain contained though. Moreover, the stable outlook reflects Moody’s expectation that susceptibility to event risks are commensurate with Serbia’s Ba2 rating thanks to low political risks, limited government liquidity and external vulnerability risks and a stable banking sector that is resilient to the foreseen deterioration in asset quality.