Serbia’s National Bank to Set Rates As Regional Volatility Resurfaces

The National Bank of Serbia will decide on its key policy rate in the week ahead, amid rising inflation pressures in the country, as well as reignited tensions with Kosovo.

At its previous meeting in early May, the southeast Balkan nation’s central bank maintained its interest rate at 3.0%, where it has resided since April 2018.

While Serbia’s rate of inflation has accelerated to 3.1% year-on-year, the pace to date in 2019 continues to move within the bounds of NBS’s target tolerance band (3.0±1.5%).

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Thursday, June 6

• National Bank of Serbia – Key Policy Rate Decision

The central bank attributed more than half of the upward rate in inflation to an uptick in the prices of vegetables.

Growth factors

According to preliminary data of the Serbian Statistical Office, GDP grew in the first quarter of 2019 by 2.3% over the prior year, and excluding the seasonal effect, expanded by 0.9% on a quarterly basis — amounting to 18 consecutive months of upward momentum.

NBS governor Jorgovanka Tabaković said that a “key contribution to growth came from fixed investments” which posted growth of 7.4% in the first quarter – notably, private investment by 8.0%, and government by 4.7%.

Overall, growth in the country has been mainly due to domestic factors, he said.

The central bank governor continued that Serbia’s economy “has become more attractive to investors mainly owing to the improved business climate and favorable financial conditions, while the implementation of infrastructure projects has also accelerated.”

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The NBS expects growth of 3.5% in 2019 while anticipating an incline to 4% in “the coming years, with growth resting on firm grounds, primarily owing to the preserved macroeconomic stability.”

Similar to Croatia’s economic situation, a broader slowing of growth across the European continent, including Serbia’s main trading partners Germany and Italy, is likely to weight on the nation’s growth prospects.

Furthermore, Fitch Ratings analysts Douglas Winslow and Erich Arispe recently noted that Serbia also has “lower GDP growth potential, higher public debt, a greater share of foreign-currency-denominated debt, and higher net external debt” compared to the medians of its peers.

Its current account deficit, at 5.2% of GDP, is also wider than its ‘BB’ junk status sovereign credit rating median of 2.3%. although it has been “fully covered by strong” foreign direct investment flows in recent
years.

Tensions reignite

Against this backdrop, tensions between Serbia and the Republic of Kosovo have recently flared, after reports that Serb-armed forces were deployed towards their shared border. The mobilization was apparently in response to a Kosovo-led anti-organized crime operation in Serb-dominated northern Kosovo that resulted in the arrest of around two dozen people, including Serbs and Bosnians.

The activity marks the latest confrontation between the two sovereigns, albeit Serbia does not recognize Kosovo’s claim to independence in 2008.

Kosovo’s fight for sovereignty, in the war of 1998-1999, was won after the North Atlantic Treaty Organization (NATO) intervened and halted a Serb crackdown against Kosovo Albanian separatists and civilians.

The latest incursion could throw a wrench into the gears of Serbia’s growth expectations should it escalate and create a wave of volatility in the region.

Market participants will likely be paying close attention to the unfolding of developments between Serbia and Kosovo, as well as the NBS’s rate decision and Serbia’s pace of inflation and GDP, amid the country’s exposure to slower growth across Europe – notably among its top trading partners, including Germany and Italy, as trade-related effects and Brexit continue to pose downside global risks.  

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