Serbia needs to form a government as quickly as possible to ease concerns about its fiscal outlook, Fitch Ratings said.
May 6 parliamentary elections in the Balkan nation produced no clear winner and main political parties are negotiating a coalition government. A delay in establishing a Cabinet “might lead to significant fiscal slippage in 2012,” the agency said in a statement today from London.
Serbia’s budget deficit expanded to 80 billion dinars ($845 million) in the first five months of the year, to between 7 percent and 8 percent of gross domestic product, while public debt approached 50 percent of GDP, exceeding fiscal targets, the country’s Fiscal Council said on May 30.
“The longer it takes to form a government, the harsher the fiscal measures to rein in the 2012 deficit are likely to be,” Fitch Ratings said. Serbia’s legal deadline to have a government or repeat the vote is the end of August.
The “uncertainty” in the election aftermath remains “within the tolerance of the ’BB-’ rating,” Fitch said. The rating may come under pressure in case of a protracted period without a government, it said.
The economy contracted 1.3 percent in the first three months and Fitch Ratings expects it to stagnate in 2012.
“Serbia is also sensitive to events in Greece, given its banks’ large exposure to the Greek banking sector,” the rating agency said. “Ideally, a government would be in place ahead of Greece’s re-run elections on June 17, in case investor concerns increase to the point where a policy response is needed.”
Serbia also needs a new government to resume talks with the International Monetary Fund, which froze a $1.3 billion precautionary loan program with the country in February as it became clear it would slip on the agreed targets, including keeping the public debt to 45 percent of GDP.
“A new deal with the IMF would be key to reducing investors’ uncertainty,” Fitch Ratings said. “Fitch regards the IMF program as positive, providing an anchor against excessive deviations” as well as playing an “important role in financing Serbia’s sizable current account deficits.”
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