S&P Lowers Serbia's Growth Forecast to 3.2% Ahead of Vote

Standard and Poor’s left Serbia’s investment grade rating unchanged on September 15, holding it at the agency’s lowest tier, but at the same time trimmed its forecast for this year’s gross domestic product growth to 3.2 percent, down from the 3.3 percent it had projected in March. The rest of the figures in the report stayed the same. A lowest investment grade rating means that, in the agency’s view, Serbia still qualifies as a country worth investing in, but only barely, with little cushion for a larger shock.

The heart of the report deals with the fiscal fallout of the pre-election period. In August, the government used a budget rebalance to raise its deficit target from 3.0 to 3.5 percent of GDP, freeing up money for the social benefits tied to the vote. S&P does not see that move as a fiscal necessity.

“Strong fiscal results in the first half of the year could have brought the deficit down to somewhere between 2.0 percent and 2.5 percent of GDP. The government instead used the revenue surplus to fund a pre-election support package worth around one percent of GDP,” the agency wrote in its report.

That is the first official estimate any rating agency has put on the value of the pre-election relief package, and it has not been reported before now. S&P says it still expects a return to fiscal discipline next year, despite the short-term risks the package has created. A similar, sharper warning came earlier from Fitch, which flagged bigger risks tied to the widening deficit.

As the main risks to growth over the short and medium term, S&P points to high global energy prices driven by the conflict in the Middle East, and a prolonged drought hitting both agricultural output and electricity production. The agency also singles out political risk: domestic instability after the election that could dent consumer and investor confidence, as well as a possible delay in forming a new government, which would prolong uncertainty over the continuity of economic policy. NIS also featured among the risks the agency listed, while Serbia’s path toward European Union membership is treated as a separate, long-term item.

Even so, the agency judges that political risk has so far stayed contained.

“Previous demonstrations had a limited impact on day-to-day policy making,” S&P wrote, adding that despite heightened tensions it still expects continuity of policy and institutional stability overall.

The report also draws on available opinion polling. According to figures the agency cites, a recent survey by CRTA and Stanford University showed the student list ahead of the ruling Serbian Progressive Party among decided voters, 44.9 percent to 35.7 percent, while the results of several local elections show the SNS holding onto a strong position thanks to its broad party and local network. No official date has been set yet for the parliamentary and presidential elections, and the agency expects the race to be more uncertain than in previous cycles.

The report also notes that Serbian authorities cut fuel excise taxes in March and began drawing on strategic fuel reserves to keep inflation in check, while flagging that the exact cost of that move to the budget, and the current state of the reserves, is not publicly known.

S&P also draws a parallel with earlier election cycles in the region: economic indicators typically take a temporary hit ahead of elections, until a new government is in place, as was the case in Hungary and, even more so, in Romania.

The next benchmark for judging Serbia’s fiscal course will be the election itself, whose date has yet to be officially announced, followed by the first budget figures after the new government is formed. Until then, S&P is sticking with its base case of policy continuity, while noting that prolonged domestic instability, further fueled by the election itself, could put that very scenario at risk.