Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Serbia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BB+/Stable; short-term local- and foreign-currency issuer ratings: S-3/Stable) on 14 November 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Serbia’s BB+ rating is supported by its improved economic resilience and solid medium-term growth prospects, underpinned by a credible macroeconomic policy framework and a steady inflow of net foreign direct investment into the economy. Serbia’s rating benefits from moderate public debt, supported by prudent fiscal policy and a continuation of reform to enhance the fiscal framework. The IMF and Serbia reached a staff-level agreement on a 24-month EUR 2.4bn (4% of 2022 GDP) arrangement in November – subject to approval by the IMF Executive Board in December. The IMF funding will help address Serbia’s external and fiscal financing needs. The upcoming adoption of a new fiscal rule in 2023, developed in consultation with the IMF, will help anchor fiscal consolidation and rebuild fiscal buffers.

However, Russia’s war in Ukraine is exerting downward pressure on Serbia’s small, open economy. High and prolonged inflation, tightening global and domestic financial conditions, a projected slowdown in European economies and supply-chain disruptions pose downside risks to the near-term growth.

Furthermore, the BB+ rating is constrained by persistent wide current account deficits, relatively high net external debt, a high degree of banking sector euroization and a large share of government debt denominated in foreign currency (euros and dollars) and institutional weaknesses.

A broader normalisation of relations between Serbia and Kosovo and substantial reform around the rule of law, the most crucial preconditions for Serbia's EU accession, are likely to remain a longer-term challenge. The fact that Serbia, to date, has not aligned with EU restrictive measures against Russia might further complicate accession talks. Scope therefore expects the accession target date of 2025 to be delayed considerably.

The Stable Outlook represents Scope’s opinion that risks to the ratings are balanced over the next 12 to 18 months.

The rating/Outlook could be upgraded if, individually or collectively: i) public debt-to-GDP were set on a firm downward path over the medium term, supported by fiscal consolidation; ii) medium-run growth prospects improved due to implementation of structural reform; iii) external vulnerabilities were curtailed, such as via a reduced share of public and private debt in foreign currency, a sustained reduction in net external debt and a further build-up of foreign-exchange reserves; and/or iv) Serbia’s institutional weaknesses were redressed more durably, the government’s capacity for reform were improved, such as via tangible progress in the longer-run accession to the EU.

Conversely, the rating/Outlook could be downgraded if, individually or collectively: i) Scope observed a steady increase in public debt-to-GDP over the medium term, as a result, for instance, of looser fiscal policies, weaker growth prospects and a currency deprecation; ii) Serbia’s external vulnerabilities increased, due, for instance, to worsening market conditions or a widening of imbalances, putting pressure on forex reserves and leading to a further build-up of external debt; and/or iii) an external shock or heightened and sustained geopolitical risks undermined Serbia’s macro-financial stability.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Levon Kameryan, Associate Director.

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