Serbia has turned to the IMF and the United Arab Emirates for help in handling its soaring debt costs in a move that highlights the impact of higher interest rates and the economic downturn on Europe’s emerging markets.
The IMF on Tuesday confirmed to the Financial Times that Belgrade had called for discussions on a so-called standby arrangement. Such an arrangement would allow Serbia to draw on IMF support in the event that Belgrade could not sell its bonds to investors.
Authorities hope that having the Fund’s assurances in place will prevent further rises in the country’s borrowing costs on international markets, which have more than tripled since the turn of the year from less than 2 per cent to more than 6 per cent.
“You don’t want to have a standby arrangement with the IMF if you’re a stable country but maybe it’s better to eat humble pie now to make sure you are not refinancing at more than 6 per cent,” said Tamara Basic Vasiljev, senior economist at Oxford Economics.
News of the IMF request comes after Abu Dhabi offered Serbia a $1bn loan at 3 per cent. “If we were to enter the financial market, it would cost us at least two-and-a-half times more,” said Aleksandar Vučić, Serbia’s president, in a statement published on Monday, adding that Belgrade was facing “resistance by all investors, because it’s mostly western financial investors”.
Serbia is one of several countries in central and eastern Europe, including Hungary and Romania, that have seen their borrowing costs soar on the back of the US Federal Reserve’s and the European Central Bank’s sharp increases in interest rates.
The country’s most liquid euro-denominated bond was trading with a yield of 6.3 per cent on Tuesday, compared with 1.8 per cent at the end of last year.
While financing costs have risen across Europe, riskier borrowers — such as Serbia — have seen yields soar at a far faster rate. The gap between Serbia’s yields and those of Germany has widened, from 2.2 percentage points in January to just under 5 percentage points.
Credit rating agencies have warned Belgrade that its government and banking sector are exposed to funding risk owing to a high share of foreign currency loans. The economic outlook is becoming more downbeat. Its central bank believes a downturn in the eurozone, Serbia’s biggest trading partner, is likely to weigh on growth, while the war in Ukraine has triggered a rise in inflation to 13.2 per cent in the year to August.
Serbia has also become more politically isolated from the rest of Europe since the onset of Russia’s invasion after it refused to join western sanctions against Moscow. The European parliament in its June report on Serbia urged Belgrade to “reassess its economic co-operation with Russia”.
Vučić, who was re-elected for a new term as president in April, insists on keeping diplomatic channels to Moscow open even as Serbia continues to angle for eventual EU membership.
Abu Dhabi is already a major investor in Serbia, with UAE companies holding a stake in the national airline and developing a $3.5bn mega-project on the Danube riverfront in Belgrade.
Discussions with the IMF will continue in the coming weeks.
The IMF and Belgrade will assess the economic and financial situation and determine the size of the country’s overall financing needs as well as an appropriate policy response, the Fund said.
Serbia agreed a three-year, $1.2bn standby arrangement with the Fund in February 2015 but did not draw on it.
Source: Economy - ft.com
