ANALYST COMMENT – Serbia's $520 Mln Standby Deal with IMF Sends Positive Signal to Investors

Serbian will tap the IMF funds only if necessary under the deal signed late on Thursday. The 15-month precautionary funding agreement equals 75% of Serbia’s total quota with the IMF. The deal is pending approval by the IMF board of directors and Serbia’s government.

After the agreement was signed Serbia's central bank governor Radovan Jelasic said he expects the country’s economic growth to slow down to 3.0% in 2009 from 7.0% projected for this year, while inflation will decelerate to 8.0% at the end of next year. He also said the country’s swelling current account deficit will be cut to 16% of GDP next year from the current 18%.

Four analysts polled by SeeNews issued the following comments on the IMF deal and the central bank macroeconomic projections:

DUSKO VASILJEVIC, ECONOMIST WITH SERBIAN ECONOMIC THINK-TANK CEVES:

“The IMF deal is definitely positive for Serbia [...] It is a good signal to foreign investors. The fact that the IMF has approved certain macroeconomic policies for the coming two years surely gives more confidence to investors. It is very important that Serbia looks like a stable place for investment as its main problems are connected with the trade gap and the current account deficit.”

“Another benefit is that a balanced macroeconomic policy for the coming period has been achieved. The first drafts of the 2009 budget envisaged an extreme deficit of some 5.0%-5.5% of GDP, which would have been really hard to sustain. Now the IMF reputation has helped some cuts to be made and this budget to be more restrained, so now the deficit has been agreed to be maximum 1.5% of GDP.”

“The third positive thing is that now under the standby arrangement we will have access to these [millions]. We don’t have to use them unless in need but it is good to have the option to use this protecting mechanism to weather any potential shocks if the global crisis worsens.”

“The access to IMF funding also leaves some room for the central bank to mitigate any blows on the [dinar] exchange rate by its foreign exchange reserves. On the other hand, an increase in capital inflows to Serbia will have a calming effect on the exchange rate.”

“I think Jelasic’s projections are realistic and according to some estimate of our own the GDP growth could even be bigger, at some 4.0%. I also agree the current account deficit will shrink – a drop in oil prices alone can translate into a cut of two to three percent of GDP. Besides, economic activity slows down, demand falls, which results in lower imports. Lending activity also slows down. So, all this is pretty enough to believe the [current account] gap can be cut to some 16%.”

MILAN KOVACEVIC, BELGRADE-BASED INDEPENDENT FOREIGN INVESTMENT CONSULTANT

“Our arrangement with the IMF can be of great benefit to us because the state can use it as an excuse to put forward a more fiscally restrictive budget and reduce public spending,” Kovacevic said, adding that Serbia’s financial stability, persistently lauded by government officials, is always at risk and that the IMF arrangement will add extra confidence and security.

“The stand-by arrangement minimises chances that the government will take risks and swell up the budget.”

“Jelasic’s [GDP growth] projection is realistic with the help of the IMF, provided that the intensity of the global financial crisis declines and the country becomes more competitive.”

JURIJ BAJEC, ANALYST AT BELGRADE-BASED ECONOMICS INSTITUTE THINK TANK

“The IMF cares only about achieving a 2009 budget gap equivalent to 1.5% of GDP. The way the state has decided to achieve it is by freezing the salaries in the public sector and by not raising pensions any more in 2009.”

As of October, Serbia raised pensions by 10%, increasing its budget deficit to 2.0% of GDP, from 0.5%. The new government, which took office in July, has pledged to raise pensions to up to 70% of the average net salary.

ADVISOR TO DEPUTY PRIME MINISTER BOZIDAR DJELIC WHO REQUESTED ANONIMITY

“I am not convinced that our credit rating is going to improve because of the deal, but we will consider the deal a success if the rating doesn’t drop. When you take a look at European countries and the U.S., their overall rating has gone down.”

“In the light of the challenging times we live in, the arrangement with the IMF should help foreign investors view Serbia as a potential investment destination.”

($=0.7898 euro)