Serbian Austerity Plan to Aid Bonds, Credit Rating, Finance Minister Says


By Gordana Filipovic

Serbia’s efforts to rein in public spending may win the country its first-ever credit rating upgrade and attract bond investors, the finance minister said.

A chance for lower borrowing costs that would follow from a higher debt rating will require the state deficit to remain at 4.1 percent of gross domestic product next year, Diana Dragutinovicsaid in an interview. The government will also have to borrow selectively as investors “increasingly focus on fiscal policy.”

“If there are no developments that could lead to a deteriorating fiscal position and if we quickly manage to bring inflation back on track, that will be sufficient to have our credit rating upgraded in 2011,” Dragutinovic said.

Serbia is rated ‘BB-’ by Standard & Poor’s and Fitch with a stable outlook and is not rated by Moody’s. Croatia and Hungary had had their credit ratings downgraded last week to a step above junk. S&P cited Croatia’s deteriorated fiscal position and weak external financing for the downgrade, while Fitch downgraded Hungary on fiscal policy concerns.

Serbia’s economy will grow between 1.5 percent and 2 percent this year after a contraction of 3 percent in 2009, the 52-year-old minister said. With national elections approaching in 2012, her ministry will restructure the tax administration to better control tax collection, especially from large public companies, she said.

Economic growth is the most dynamic in the region, “fiscal policy is in line with fiscal rules and counter-cyclical, and we can finance the balance of payments and the budget deficit,” she said.

Spending Eyed

Dragutinovic, the first woman ever to oversee the Balkan nation’s finances, said her efforts to control spending are matched by the central bank’s resolve to fight inflation with five consecutive interest rate increases since August.

“The growth rate is picking up from quarter to quarter and the third quarter growth, if annualized, exceeds 4 percent,” she said. If growth remains equally strong in the last quarter of the year “then growth in 2011 will exceed 3 percent.”

Stronger growth and demand for cash should translate into an expansion of credit, with foreign-owned banks in Serbia bringing in new capital in 2011, she said.

Telecom Sale

Serbia also expects to attract at least 1.4 billion euros ($1.97 billion) from the sale of a 51 percent stake in Telekom Srbija, which will help stabilize the dinar along with the lower budget deficit, boosting investor confidence in the dinar debt market, she said.

A Dec. 29 auction of 6-month euro-indexed Treasury bills shows investors are more comfortable if they can hedge their investment against the dinar’s depreciation.

Dragutinovic said she still wants to test the market with longer-dated maturities for additional borrowing and plans to sell dinar-denominated bonds with maturities of between 370 days and two years next year.

Serbia, which wants to become a candidate for membership in the European Union, wants to lure investment in the domestic debt market to cut the cost of debt servicing, thus keeping debt levels below 45 percent of GDP, the cap set by fiscal rules, Dragutinovic said. Finding cheaper funding is the key to keep debt levels below 45 percent of GDP, the cap set by fiscal rules, Dragutinovic said.

The government needs 220 million euros to 250 million euros a year through 2016 to repay private foreign-exchange savings frozen by banks when the former Yugoslav federation broke apart in the early 1990s.

A bond issue, originally meant only for local insurers through a private placement, will be made available to all investors, with the government setting the price of the bond, she said.

“The price would be probably between 5.5 percent and 5.8 percent,” to allow some risk premium, the minister said. “I know what the long-term growth rate of this economy is, and that is roughly the interest rate on our borrowing. Anything close to those levels, of around 5 to 5.5 percent, is acceptable.”

To contact the reporter on this story: Gordana Filipovic in Belgrade at

To contact the editor responsible for this story: James M. Gomez at