"The ratings on Serbia are constrained by the country's large external imbalances in the wake of the global credit market dislocation and slow progress on the structural reform agenda," S&P credit analyst Marko Mrsnik said in a statement.
"Offsetting these constraints are Serbia's strong growth potential, declining debt burden, and improved prospects of EU integration," he added.
In 2008, Serbia’s current account deficit nearly doubled to around 18% of GDP from 10.0% of GDP in 2005 on the back of surging imports, driven by buoyant domestic demand. Financing the external gap in the current environment could become problematic, the statement said.
While Western European banks hold the dominant share of country's banking system, given the current market conditions, some of these banks may be reluctant to add to their existing cross-border exposure, which could lead to a rapid slowdown in credit and economic growth, it added.
“We expect GDP growth to decelerate to just below 2% during 2009, before picking up again toward 5% by 2011. Inflation will gradually recede across the forecast horizon,” S&P said.
Last month Belgrade signed a 15-month, $520 million (360 million euro) precautionary stand-by arrangement with the IMF, according to which the government adopted a budget bill for next year with a deficit equivalent to 1.5%/GDP. Serbia can tap the funding under the deal equal to 75% of the country's total quota with the IMF only in case of need.
In line with the IMF agreement, the 2009 and 2010 budgets are expected to be restrictive, based on freezing pension levels and capping wage increases in line with inflation in order to reach deficits of 1.5%/GDP and 1%/GDP, respectively, S&P said.
“The negative outlook on Serbia reflects our opinion that further downside risks prevail to the economic and fiscal outlook as the current global credit market crisis continues,” it added. “Given the large external financial imbalances, the risk of the credit squeeze resulting in an even sharper downturn in growth and further widening of the fiscal imbalances would lead to downward pressure on the ratings. Conversely, a lasting improvement in external financing conditions or a successful budgetary consolidation in the near term would support the ratings.”
