International rating agency Fitch assigned 'BB-' long-term foreign and local currency ratings to Serbia with stable outlook on both ratings. The same rating was assigned to the USD-denominated bond issue of the country, which matures in 2024
and was issued against the liabilities towards the London Club, as well as to the EUR-denominated "frozen currency" bonds. The short-term rating of Fitch is 'B'.
The agency pointed the improving public finances, comfortable external liquidity position, ongoing structural reports, good economic growth prospects as well as the potential EU accession as the main factors that contributed for the longterm rating. Fitch recommended further restructuring and privatisation of state-owned companies, reduction of subsidies and social benefits as well as improvement of the business climate so that the last year's strong GDP growth is sustained. The restructuring of the government's debt contributed to its decline to 59% at the end of 2004 from more than 200% at end-2000.
The relatively low near-term debt service burden was also highlighted as a positive factor for debt sustainability. At the same time, Fitch pointed the huge CA deficit (15.6% of GDP in 2004 according to its estimates) as the main vulnerability source. The high level of inflation and the significant "euroisation", which serves as an impediment for the swift implementation of the monetary and foreign exchange policies, was also noted. Strong export growth is expected to bring down the CA deficit to 11.5% of GDP this year, according to the agency. Noteworthy Fitch stated that Serbian ratings have upward potential in the medium term in case cautious fiscal polices are followed and structural reforms are accelerated.
Political risks as well as risks from external financing were pointed as main factors for potential downgrade.
IntelliNews comment: The long-term foreign currency rating of Fitch is one notch higher than the ones of S&P (assigned on Nov 1), which is completely in line with our expectations. As we noted Serbia made significant progress with ICTY cooperation and this resulted in the approval by the European Commission on Apr 12 for the start of talks on Stabilisation and Association Agreement with the EU later in the year.
The cabinet conducted prudent fiscal policies in the last few months and agreed with the IMF to follow the same path by the end of the year. It also started restructuring some of the largest state-owned companies as well as accelerated privatisation of small firms. Bank privatisation has proceeded very successfully and foreign reserves increased significantly since the start of the year. The CA gap was nearly halved in Q1 on the back of very strong import growth. On the negative side we note the acceleration of inflation in early 2005 and the high (and rising) level of unemployment. Finally it should be noted that political risks have declined significantly in the last few months and considering the improved macroeconomic environment we expect further upgrades in the medium term.