FRIDAY, 27/10/2023 - Scope Ratings GmbH
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      Scope affirms Serbia's credit ratings at BB+ and maintains the Stable Outlook

      A robust long-term growth outlook and sound fiscal policy support the ratings. Substantial external debt and structural current account deficits are constraints.

      For the updated rating annex, click here.

      Rating action

      Scope Ratings GmbH (Scope) has today affirmed Serbia’s long-term issuer and senior unsecured debt ratings at BB+ in both local and foreign currency and maintained the Stable Outlook. The short-term issuer rating has been affirmed at S-3 in both local and foreign currency with Stable Outlook.

      Summary and Outlook

      Scope's affirmation of Serbia's BB+ ratings is based on the following credit strengths: i) a well-established macroeconomic policy framework, characterised by a history of sustained and balanced growth rates and a robust long-term growth outlook; and ii) sound fiscal policies, reflected in good pre-pandemic budget outcomes that have led to a moderate public debt burden.

      Rating challenges include: i) substantial net external debt combined with structural current account deficits; ii) a prevalence of foreign currency, primarily in euros, within the financial sector, encompassing public and private debt; and iii) Institutional weaknesses in terms of governance metrics (as measured by the World Bank), alongside complexities associated with Serbia's EU membership aspirations.

      The Stable Outlook reflects Scope’s view that the risks Serbia faces over the next 12 to 18 months are well balanced.

      The ratings/Outlooks 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 or materially improved GDP growth prospects; ii) external vulnerabilities were reduced, which could be achieved through a sustained decrease in the share of public and private debt in foreign currency, or a considerable reduction in external debt and/or iii) Serbia’s institutional weaknesses were redressed more durably, 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) there was a consistent rise in the public debt-to-GDP ratio over the medium term, due to, for instance, a relaxation of fiscal policies or weakened growth prospects; ii) Serbia’s external vulnerabilities intensified, causing pressure on reserve adequacy or triggering a further accumulation of external debt; and/or iii) an external shock or prolonged geopolitical risks undermine Serbia’s macro-financial stability.

      Rating rationale

      Serbia's BB+ ratings are supported by solid long-term growth prospects and a well-established macroeconomic policy framework, characterised by a history of sustained and balanced GDP growth rates.

      For 2023, Scope anticipates a deceleration in Serbia's small yet increasingly open economy, with real GDP growth moderating from 2.5% in 2022 to 2.0%, a projection in line with Scope's mid-year outlook. This temporary slowdown is due to factors such as high inflation, a tight monetary policy, budget consolidation, and the country's close ties to the sluggish European economy, where the broader Euro area is expected to grow by an average of 1.0% in 2023. Serbia's growth in the first half of 2023 was driven by strong net exports, supported by decreased imports due to increased energy storage, and to a lesser extent, by fixed investment, while consumption and inventories made a negative contribution.

      Scope anticipates Serbia's GDP growth to recover to 3.0% in 2024, driven by reduced global inflation and global economic recovery. In the period from 2025 to 2026, Scope expects Serbia's GDP growth to return to the pre-pandemic pace of 3.5% per year, supported by significant foreign direct investments (FDI) and expanded public investments in infrastructure projects, particularly in transportation, energy and utilities, aimed at boosting productivity. Serbia's growth outlook faces risks from international factors, specifically global economic conditions, persistent inflation, and central bank policies, given the critical role played by FDI inflows, investments in the energy sector, and infrastructure development. Preceding the Ukraine conflict, Serbia's energy reliance on Russia was primarily in the gas sector, with a low disruption risk due to a stable Gazprom contract and the operational Balkan Stream pipeline. Conversely, Serbia's diversified oil imports have bolstered resilience in the face of geopolitical uncertainties.

      Scope expects inflation to gradually decrease, reaching approximately 9.0% by the year-end and an average inflation rate of 4.5% in 2024. Key factors contributing to this decline include previous monetary tightening, diminishing global cost pressures, and a high base for energy and food prices. In October, the National Bank of Serbia maintained the key policy rate at 6.5% after recent adjustments, which included a cumulative 550-basis point increase in the key policy rate during the current cycle since April 2022.

      Serbia’s BB+ ratings are further supported by sound fiscal policies, characterised by pre-pandemic budgetary surpluses, concurrent with growing public investment, and a moderate level of debt.

      Serbia reduced its fiscal deficit to 3.1% of GDP in 2022, down from -4.1% in 2021, primarily due to prudent expenditure control and robust revenues, bolstered by elevated inflation. This improvement was further facilitated by increases in energy tariffs, which curtailed fiscal subsidies to energy sector state-owned enterprises. Scope's projection for Serbia's 2023 budget deficit stands at 2.9% of GDP, which compares favourably with the government’s initial budgeted deficit of 3.3% considering strong revenue growth in the first half of 2023 and a gradual decrease in fiscal transfers to state-owned energy companies, which still allows for essential investments and discretionary spending.

      The medium-term fiscal plan, supported by fiscal regulations limiting public sector wage and pension growth and the public debt-to-GDP ratio, envisions a continued deficit reduction to 1.5% by 2025, with a substantial allocation for strategic investments in transport and energy infrastructure. Fiscal consolidation will be supported by structural measures aimed at bolstering revenue collection, which are essential to sustain a declining public debt-to-GDP ratio due to significant investment needs. Scope forecast Serbia’s moderate debt-to-GDP ratio to gradually decline to around 51% of GDP in 2023 and decline further to 48% 2025.

      Despite these key credit strengths, Serbia’s ratings face the following challenges:

      Serbia’s external debt, although recently on a declining trend, remains high at 69.3% of GDP at the end of 2022, up from pre-pandemic level of 61.4% in 2019. A negative net international investment position (NIIP) of minus 82.0% of GDP in 2022, coupled with structural current account deficits which should range from 4.0-5.0% of GDP in the medium term, reflect the country’s reliance on foreign capital for growth. This external imbalance is primarily driven by increased investment and the corresponding import of equipment and goods Serbia's negative NIIP is largely due to FDI liabilities, which decreases the risk of money flight during times of global market distress. Although the NIIP's negative position reached its peak in 2020, recent moderation suggests progress in managing external financial obligations. The reduction of non-resident holdings of local currency debt and the maintenance of low short-term external debt at 11% of GDP in June 2023 support financial stability.

      The current account deficit worsened substantially to 6.9% in 2022 because of higher energy prices and domestic energy supply problems. Scope foresees a narrowing of the current account deficit to approximately 3.5% of GDP in 2023, attributed to decreased imports, stemming from energy stockpiling carried over from the previous year, and robust growth in manufacturing exports. Strong foreign direct investment inflows largely directed towards export-oriented sectors continue to fully cover the current account deficit, bolstering Serbia’s external position. Serbia’s reserve adequacy has recently improved, reflected by FX reserves coverage of 318% of short-term external debt in June, compared to 275% in 2019.

      Secondly, a high foreign-currency share of public and private debt constitutes a risk for financial stability. This makes debt and interest vulnerable to exchange-rate volatility, for example during depositor confidence shocks, as observed in the first half of 2022 when around EUR 2.2bn in reserves were sold. The National Bank of Serbia subsequently accumulated around EUR 3bn in foreign exchange reserves by year-end, stabilising the exchange rate. The euroisation of deposits and loans remains high at approximately 50% of total stocks. At the same time, Serbia’s mostly foreign-owned banking sector presents low contingent liability risk to the sovereign balance sheet. Risks associated with the large share of general government debt in foreign currency (around 70% in in June 2023, mostly in euros) are further mitigated by a large share of fixed-rate debt, relatively long maturities and a high share of multilateral and institutional debt holders.

      Finally, Servia faces institutional weaknesses in terms of governance metrics (as measured by the World Bank), alongside complexities associated with Serbia's EU membership aspirations.

      While Serbia's EU membership ambitions underpin policy decisions, the process presents challenges, including issues concerning the rule of law, relations with Kosovo, and alignment with EU sanctions on Russia. The EU-backed draft agreement between Serbia and Kosovo, aimed at enhancing regional security and facilitating their EU ambitions, faces uncertainties regarding formal signing and execution due to ongoing tensions. Scope expects Serbia's EU accession progress to depend on the implementation of the EU-backed agreement with Kosovo.

      Policy stability likely to continue under President Alexander Vucic's administration, supported by the EUR 2.4bn Stand-By Arrangement established with the IMF, mandating structural reforms in the energy sector. The electricity and gas tariff hikes in Serbia have played a crucial role in reducing fiscal subsidies and funding essential energy investments. Furthermore, the recently enacted State-Owned Enterprise law, aligned with OECD best practices, provides a solid basis for governance reforms.

      Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

      Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative rating of ‘bbb-’ for Serbia. As such, under Scope’s methodology, an ‘bbb-’ indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

      For Serbia, the following relative QS credit weakness has been identified: i) current account resilience; ii) financial imbalances; iii) environmental factors; and iv) governance factors.

      The QS generates one negative notch adjustment and indicates a sovereign credit rating of BB+ for Serbia.

      A rating committee has discussed and confirmed these results.

      Factoring of environment, social and governance (ESG)

      Scope explicitly factors in ESG sustainability issues during its ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a significant 25% weighting under its quantitative model (CVS).

      Serbia faces a substantial challenge in reducing emissions due to its high energy intensity, nearly four times that of the EU. While coal, primarily lignite coal, still accounts for about two-thirds of electricity production, wind power has shown growth. Environmental considerations are viewed negatively, primarily due to the ongoing high reliance on coal for energy production despite efforts to diversify energy sources through EU funding and green financial instruments.

      Socially related credit factors are captured under Scope’s CVS and reflect increasing labour force participation rates that are counterbalanced by significantly increasing old-age dependency ratios. Serbia's labour market faces long-term challenges due to demographic trends, including an aging population and emigration, which constrain the labour supply. The old-age dependency ratio is projected to increase to over 35% by 2030, up from 31.6% in 2022. Nevertheless, positive developments in migration flows, such as the influx of skilled workers and foreign students, have been observed.

      Finally, governance factors are explicitly captured in Scope’s assessment of ‘institutional and political risk’ under its methodology, for which Serbia scores unfavourably on a composite index of six World Bank Worldwide Governance Indicators. Governance considerations are assessed negatively, as Serbia's pursuit of EU membership underscores policy decisions but encounters obstacles tied to rule of law and relations with Kosovo. The EU-backed agreement with Kosovo faces uncertainties in formal signing and execution due to ongoing tensions, with Serbia's EU accession progress hinging on its implementation.

      Rating Committee
      The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risks, including fiscal framework and debt dynamics; iii) external risks; iv) financial stability risks, including private sector debt; v) ESG considerations; and vi) peer developments.

      The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 September 2023), is available on
      The model used for these Credit Ratings and Outlooks is (CVS Model Version 2.1), available in Scope Ratings’ list of models, published under
      Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on
      The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
      Solicitation, key sources and quality of information
      The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
      With Rated Entity or Related Third Party participation    NO
      With access to internal documents                                 NO
      With access to management                                          NO
      The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
      Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
      Regulatory disclosures
      These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
      Lead analyst: Jakob Suwalski, Senior Director
      Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
      The Credit Ratings/Outlooks were first released by Scope Ratings on 3 June 2022. 

      Potential conflicts
      See under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

      Conditions of use / exclusion of liability
      © 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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