June 15 (SeeNews) - Serbia's first quarter GDP growth of 3.5% y/y outstripped market expectations, underpinned by external demand and revived domestic demand, both of which are expected to maintain their positive footprint this year and push full-year growth to 2.3%-2.5%, Erste Group Research said.
In 2016, Serbia is expected to experience a continuation of robust performance on the investments side thanks to a more stable economic environment, probusiness legislation and an non-performing loan (NPL) resolution program that could improve lending potential in the banking sector, Erste said in a report published on Tuesday.
Also, the more promising growth outlook for most of the country's main trading partners should support net exports despite potential upside pressures on the imports side coming from gradually stabilising domestic demand, the lender noted.
Private consumption should maintain its positive footprint, but play a more neutral role, while the labor market remains weak with additional pressures coming from the announced public administration rationing programme and restructuring of state-owned enterprises, Erste explained.
The lender sees inflation gradually moving from the current 0.7% y/y towards the middle of the NBS's target band (4%+/-1.5 bp) at the beginning of 2017, backed by low base effect, fading effects of low food and oil prices and stabilisation of economic activity.
As for monetary policy, Erste said that following NBS's decision to cut the key repo rate to 4.25% in February, there is room for additional cuts, as low inflation expectations could keep the CPI figure anchored at low levels.
With regard to international bonds, USD-denominated Eurobond yields on the Serbian market are usually mostly driven by systemic CEE and global factors, with FED policy-related expectations playing a key role, the lender explained. However, it observed downside pressures on the yield (standing at around 4.1%) recently, probably driven mostly by local factors.
"Looking forward, in the medium term, we expect the yield to mostly be shaped by benchmark movements, thus moving the USD 2021 yield more closely to 4.5%," Erste said and added that there is still room for additional compression of local currency bond yields, with the RSD 2022 benchmark bond yield expected to gradually move towards 5.5% until year-end.
In terms of politics, Erste noted that prime minister Aleksandar Vucic and his government have to stay focused on the structural reforms agenda, mainly aimed at the improvement of economic and institutional effectiveness and the strengthening of the legal and judiciary framework.
Regarding the country's international relations, the lender believes that although Serbia clearly leans towards the West, it will keep its relatively tight relations with Russia and try to find a balance between EU and Russia's local interests.
In 2017, Erste sees Serbia's GDP growth rising to 2.6%, while inflation is expected to speed to 2.5%.