London, 12 March 2021 -- Moody's Investors Service, ("Moody's") has
today upgraded the Government of Serbia's long-term issuer and
senior unsecured ratings to Ba2 from Ba3. The outlook has been
changed to stable from positive.
The key drivers of the decision to upgrade Serbia's ratings are:
1) Serbia's relative economic resilience to the coronavirus shock
and the country's solid medium term growth prospects;
2) Moody's expectation that Serbia's fiscal metrics will continue
to outperform Ba peers over the next few years, with fiscal prudence
being anchored by the continuation of reforms to strengthen the fiscal
The stable outlook balances Moody's expectations that Serbia's
economy will return to growth this year and that the government debt-to-GDP
will start declining in 2022 against the risks posed to the debt trajectory
by the potential crystallization of contingent liabilities from SOEs and
guarantee schemes, which are expected to remain contained though.
Moreover, the stable outlook reflects Moody's expectation that susceptibility
to event risks are commensurate with Serbia's Ba2 rating thanks
to low political risks, limited government liquidity and external
vulnerability risks and a stable banking sector that is resilient to the
foreseen deterioration in asset quality.
Concurrent to today's rating action, Serbia's local-currency
country ceiling has been increased by one notch to Baa1 from Baa2.
The four-notch gap to the sovereign rating reflects predictable
institutions and government actions, moderate government footprint
in the economy and financial system, low political risk and external
imbalances. The foreign-currency ceiling has been increased
by two notches to Baa2 from Ba1. The one-notch gap to the
local currency ceiling reflects improved policy effectiveness and moderate
RATIONALE FOR THE UPGRADE TO Ba2
FIRST DRIVER: SERBIA'S RELATIVE ECONOMIC RESILIENCE TO THE
CORONAVIRUS SHOCK AND SOLID MEDIUM TERM GROWTH
The first driver of today's rating action relates to Serbia's
relative economic resilience to the coronavirus shock and the country's
solid medium term growth prospects. After averaging 4.4%
in 2018-19, real GDP contracted by a preliminary 1.0%
in 2020 due to the impact of the coronavirus shock. This contraction
compares well with regional and rating peers, reflecting a robust
economic momentum at the onset of the pandemic and the fiscal space created
in recent years that allowed the implementation of a comprehensive fiscal
response. Moreover, the structure of the economy adds to
Serbia's resilience, including the relatively low reliance
on sectors particularly affected by the pandemic such as tourism and the
favorable performance of the agriculture sector.
Macroeconomic stability during the coronavirus crisis was also supported
by the IMF Policy Coordination Instrument that ended successfully earlier
this year. Under the program, Serbia made progress in reducing
the fiscal risks stemming from the SOE sector and advanced its privatization
agenda despite some delays. The authorities have signaled their
commitment to another IMF non-financing program that would help
to anchor fiscal policy by strengthening the fiscal framework, and
continue the implementation of structural reforms.
Moody's expects that growth will resume in 2021, with real
GDP expanding by 4.7%, driven by the recovery in domestic
demand supported by the normalization of economic activity on the back
of a relatively rapid vaccination rollout and significant public investment.
The recovery will also be supported by additional fiscal measures that
have recently been announced. Beyond the uncertainty posed by the
course of the pandemic, the key downside risk arises from the evolution
of external demand that depends on the pace of the recovery in the EU,
which remains Serbia's largest trade partner. Serbia's medium-term
growth outlook remains robust, with potential growth of around 3-4%
supported by its reorientation towards exports and strong prospects for
More generally, Serbia entered the coronavirus crisis with an improved
macroeconomic profile and reduced external imbalances achieved in recent
years. The improved profile includes low and stable inflation,
a relatively stable exchange rate, adequate foreign exchange reserves,
more balanced growth supported by increased economic diversification,
a stronger government balance sheet given the pre-pandemic marked
fiscal consolidation, and lower -- albeit still present --
fiscal risks from contingent liabilities from SOEs.
SECOND DRIVER: EXPECTATION THAT FISCAL METRICS WILL CONTINUE TO
OUTPERFORM Ba PEERS, WHILE FISCAL PRUDENCE WILL BE ANCHORED BY THE
CONTINUATION OF REFORMS TO STRENGTHEN THE FISCAL FRAMEWORK
The second driver is underpinned by Moody's expectation that Serbia's
fiscal metrics, despite deteriorating, will continue to outperform
many Ba peers over the next few years. The substantial fiscal consolidation
pursued in recent years has afforded Serbia with fiscal space to respond
to the coronavirus pandemic. Despite the large fiscal response
to the crisis, the fiscal metrics have deteriorated less than most
Ba peers and the debt-to-GDP ratio is projected to resume
its downward trajectory in 2022.
The fiscal package implemented by the authorities was the largest in the
region, at around 12.5% of GDP in 2020. This,
along with the economic contraction, led to a deficit of about 8%
of GDP and an increase of the general government debt to GDP to about
58% of GDP in 2020 from 52.9% in 2019, while
remaining below the median of Ba peers (estimated at 63% of GDP
as of 2020). The fiscal deficit will be reduced more gradually
than envisaged in the 2021 budget due to the recent introduction of additional
measures to support the economy. A third round of fiscal support
measures was announced in February (equivalent to 4.3% of
Moody's estimated 2021 GDP) and Moody's projects that the
fiscal deficit will be around 4.6% of GDP in 2021.
Nevertheless, Moody's envisages that the pace of the fiscal
consolidation will be more rapid for Serbia than for a number of Ba rated
sovereigns and that debt-to-GDP, while approaching
60% this year, will remain about 10 percentage points below
the median of the Ba rated sovereigns in 2021. Moody's also expects
that the government will focus again on fiscal consolidation as the impact
of the pandemic gradually fades, potentially under a new IMF non-financing
program. This focus will support the debt-to-GDP
ratio resuming its downward trajectory in 2022. Furthermore,
Serbia's debt-to-revenue ratio -- at around 141%
at end-2020 -- will continue to compare strongly with the
median of Ba rated sovereigns (estimated at 283%), being
the second lowest in the Ba rating category, reflecting also relatively
higher revenue generation capacity.
Debt affordability has also improved in recent years and until the start
of the pandemic, helped by favorable market conditions in light
of the stronger fiscal position, early redemptions of relatively
expensive debt and confidence instilled by the IMF program. Debt
affordability metrics are also stronger than for many Ba rated sovereigns.
In particular, general government interest payments as a percentage
of revenue stood at 4.9% in 2020 from 7.7%
in 2015, well below the median of the Ba category which stands at
The pre-pandemic track record of fiscal consolidation was accompanied
by steps to improve the fiscal framework, including measures to
enhance budgetary processes and transparency, contain public wages
bill and pension spending, and address the fiscal challenges posed
by the SOEs sector, progressing with the privatization agenda.
While the reform progress have slowed in certain areas in part due to
the impact of the pandemic (for example, the reforms of public sector
employment and the fiscal rule were postponed), and contingent liabilities
continue to pose fiscal risks, Moody's expects that the progress
made in consolidating the public finances in recent years will continue
with the assistance of international financial institutions. Hence,
while Serbia's fiscal situation has been inevitably affected by
the coronavirus crisis, the impact on Serbia's credit profile
has been more contained than elsewhere.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Serbia's ESG Credit Impact Score is moderately negative (CIS-3),
reflecting moderate exposure to environmental and social risks and an
average governance profile, the latter also explaining a certain
degree of resilience to E and S.
Serbia's credit profile is moderately exposed to environmental risks,
reflected in its E-3 issuer profile score. While the share
of agriculture in gross value added has fallen over the last decade,
it continues to account for almost a fifth of total employment.
As a result, Serbia is exposed to the risk of temporary supply shocks
stemming from adverse weather shocks, including drought, which
adds to the volatility in GDP growth. Risks stemming from water
and waste and pollution are low.
Exposure to social risks is moderate (S-3 issuer profile score),
and it is mainly related to its demographic profile and high youth unemployment,
that has contributed to recurrent emigration of workers. Most other
social risk categories also pose a moderate credit risk.
Serbia's governance profile score is equivalent to G-2, reflecting
weak assessments on international surveys for the rule of law and control
of corruption that weigh on Moody's assessment of institutions and
governance strength, and constrain the business environment.
This is mitigated by the benefits arising from the ongoing harmonization
of its laws and regulatory practices with EU standards as part of its
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the economy
will remain resilient to the impact of the pandemic and growth will resume
this year. It also reflects Moody's expectation that the
government debt burden will start declining again from 2022 onwards supported
by the track record of fiscal consolidation that the government demonstrated
before the pandemic and that contingent liabilities, while continuing
to pose a risk, will not lead to a material weakening of the government's
balance sheet. Moreover, the stable outlook also reflects
Moody's expectation that susceptibility to event risk will remain unchanged,
due to low political risk despite frequent electoral cycles, and
limited external vulnerability risk given adequate foreign exchange reserves
and a current account deficit fully covered by FDIs. Moody's
also expects government liquidity risk to remain contained and the banking
sector stability to be preserved despite the foreseen deterioration in
asset quality, while the progress in reducing the high level of
euroization will not been reversed.
GDP per capita (PPP basis, US$): 18,972 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.2% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9%
Gen. Gov. Financial Balance/GDP: -0.2%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.9% (2019 Actual)
(also known as External Balance)
External debt/GDP: 61.5% (2019 Actual)
Economic resiliency: baa3
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 09 March 2021, a rating committee was called to discuss the rating
of Serbia, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed. Other views raised included:
The issuer's institutions and governance strength has increased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Upward pressure on the rating would arise from a material improvement
of the government balance sheet due to significant post-pandemic
fiscal consolidation accompanied by the evidence that the gains achieved
in strengthening public finances are unlikely to be reversed in the longer
term due to a stronger fiscal framework. A significant reduction
of the risks arising from contingent liabilities and further progress
with respect to dinarization would also be credit positive.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Conversely, negative pressure on the rating would arise if the fiscal
metrics were to deteriorate materially compared to peers due to a less
prudent fiscal stance, materialization of contingent liabilities,
significant exchange rate depreciation or the growth outlook underperforming
Moody's expectations. The emergence of external imbalances,
due for example to a significant decline in FDI that would lead to less
stable source of current account financing, would also be credit
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
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