The state of the economy and finances in Serbia shows that the epidemic has reduced the economy and increased public spending which resulted in a significant increase in the budget deficit and a sharp increase in debt.
If a new wave of the coronavirus contagion occurs during the autumn or winter, the situation with state finances will become even worse. However, Serbia would not be an exception, many countries could go bankrupt.
After the first seven months, Serbia’s budget deficit reached 2.8 billion euro, i.e. 4/5 of the 3.5 billion forecast for the entire year. The reason is clear, the state had higher expenditure due to the outbreak of the coronavirus.
Since the economy has slowed down, the budget revenue is 5% lower than last year in the same period. On the other hand, public spending has increased by 24.8%.
Discover the most important foreign investments in Serbia in 2019: click here!
A total of 1.35 billion euro from the state budget was spent only on supporting workers in industries that were most at risk due to the coronavirus. The effect of the support is visible and so far there have been no mass layoffs.
However, the epidemic has lasted much longer than initially anticipated, and the question is how long the state will be able to support the economy and help certain sections of the population.
The state has no hidden state savings that could be used now and its only income is the budget. Expenses that exceed the available budget means are covered by loans.
In April, Serbia borrowed 2 billion euro by issuing seven-year Eurobonds at a pretty high interest rate of 3.375%.
Last autumn, again through the issue of Eurobonds, Serbia borrowed at an interest rate of 1.25%. It is obvious that the pandemic has increased risk assessment, at least according to investors.
Two weeks ago, Serbia took out loans by issuing dinar bonds with the maturity date of up to 12 years. The interest rate is 4%, compared to 3.8% of the bonds issued in August. In February, before the outbreak, Serbia received long-term dinar loans with a yield of 3.4%.
Considering that the inflation is minimal and the dinar exchange rate is stable, the only thing left is that investors have increased is the degree of risk of investing money in Serbia. Some countries, considerably weaker than Serbia in terms of economic parameters during the epidemic, have been borrowing at lower interest rates.
So, for example, Croatia owes only a 1.5% yield for its five-year Eurobonds. Croatia’s advantage is that it is an EU country so investors see it, perhaps unrealistically, as a safe haven.
Serbia’s debt-to-GDP ratio has deteriorated and investors perceive this trend as a new risk. The increase in interest rates is the first consequence of the growing risk. However, it should be noted that it is a pleasant surprise that there are investors willing to lend to Serbia in the midst of a dangerous epidemic over a period of twelve years, in local currency.
(Biznis i Finansije, 25.09.2020)
This post is also available in: Italiano