Standard & Poor’s (S&P) said it has affirmed Serbia’s long- and short-term foreign and local currency sovereign credit rating at BB+, with a stable outlook.
Net foreign direct investment (FDI) flows overfund the current account deficit, bolstering the central banks’ foreign exchange reserve position, but euroisation of the financial sector remains elevated, the global ratings agency said in a statement last week.
Both fallout from the Russia-Ukraine war and weakening European growth weigh on Serbia’s economy, prompting the credit rating agency to project real GDP growth of 2.1% this year and expect that average inflation will remain high in 2023-2024, although Serbia’s fiscal and current account deficits are set to narrow substantially as a result of lower energy prices and budgetary tightening.
S&P also said:
The stable outlook reflects the balance between challenges from weaker external demand in Serbia’s key trading partners in the EU, like Germany and Italy, its heavy dependence on Russian gas supplies, and, to a lesser degree, the economic uncertainties from the Russia-Ukraine war, against the country’s long-term growth prospects and prudent fiscal management.
We could consider lowering the ratings if an economic slowdown in Serbia’s key EU trading partners, notably Germany and Italy, affects Serbia’s growth prospects and the government’s fiscal position more than expected, leading to an increase in public debt. Additionally, a significant drop in Serbia’s foreign exchange reserves, perhaps from a commodity price shock or consistently weaker net FDI inflows, could serve as a downward trigger.
If we determine that Serbia’s growth outlook, external balances, and public finances are improving, and that the effects of the economic slowdown for Serbia’s key trading partners dissipate, we may raise our ratings on the country. Less geopolitical uncertainty would also create ratings upside.
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