Bloomberg News

Serbian Fiscal Council Says Wider Deficit ‘Justified and Timely’

September 30, 2011

Sept. 30 (Bloomberg) -- Serbia’s plan to widen the fiscal gap under its supplementary 2011 budget is “justified, desirable and timely” in order to respond to an economic slowdown already seen in declining budget revenue, the Fiscal Council said.

The widening of the deficit to 4.5 percent of gross domestic product from 4.1 percent as set in the original budget at the start of the year is also in line with fiscal rules and reflects new forecasts of weaker than expected economic growth, the Fiscal Council said in a report to parliament and made available to Bloomberg.

The new deficit plan has been approved by the International Monetary Fund, whose board of directors confirmed a new, 1 billion-euro ($1.36 billion) precautionary loan deal for the Balkan nation last night.

“In line with fiscal rules, but also in the spirit of good economic policy, it is allowed to increase the fiscal deficit by 0.4 percent of GDP, or roughly by around 13 billion dinars, which matches the estimated decline in tax revenue in 2011,” the report said.

The declining tax revenue resulted primarily from an “economic slowdown,” not “bad budget planning” as public spending levels remained unchanged compared with the original 2011 plan.

The IMF revised down its forecast for Serbia’s GDP growth to 2 percent from 3 percent in 2011 and to 3 percent from 4.5 percent for 2012, to reflect global economic concerns.

Weaker Growth

With weaker growth felt across southeast Europe already during the summer and with Europe’s debt crisis, growth prospects in the third and fourth quarters “are uncertain” and “we consider that there are risks that economic growth in 2011 will be below 2 percent,” the Fiscal Council said.

Parliament appointed the three-member body from nominations of independent economists by the president and prime minister to monitor compliance with fiscal rules.

Earlier in the day, the Serbian Statistics Office reported second-quarter GDP growth of 2.4 percent, above its flash estimate of a 2.2 percent expansion compared with the same period a year ago.

Serbia could achieve the 2 percent growth if industrial output stagnates in the remaining part of the year. Further declines in industrial output could bring the full-year GDP growth further down “to around 1.5 percent.” In the best-case scenario, GDP growth could reach 2.6 percent only if industrial output recovers.

Foreign Direct Investment

The authorities pinned hopes on capital inflows and foreign direct investments for better growth results this year. The Fiscal Council says Europe’s debt crisis is likely to affect activity in the banking sector in Serbia, majority owned by institutions from Italy, Greece, Austria and France, forcing them to refrain from adding capital to their Serbian units “until the situation at home stabilizes.”

The country’s borrowing costs will likely increase as risk premium, measured by JP Morgan’s Emerging Market Bond Index (EMBI), already topped 600 basis points at the end of September, or 250 basis points more than in April, the Fiscal Council said.

Still, Serbia’s public debt-to-GDP ratio is likely to stay below the 45 percent cap. The Fiscal Council sees the end-year public debt-to-GDP ratio at 43.5 percent if the government refrains from any additional borrowing. Last week’s debut Eurobond sale is “sufficient to finance a great deal of the deficit in the first half of the next year,” it said.

--Editors: Douglas Lytle, James M. Gomez

To contact the reporter on this story: Gordana Filipovic in Belgrade at

To contact the editor responsible for this story: James M. Gomez at

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