(Bloomberg) -- Serbia’s sovereign credit score was upgraded by S&P Global Ratings, lifting its foreign-currency bonds out of junk status and starting the country’s transformation to an investment grade issuer.
S&P moved Serbia’s long-term sovereign rating one notch higher to BBB- from BB+, according to a statement Friday. The outlook is stable. The ratings company now ranks Serbia’s credit worthiness at the same level as Hungary’s and Romania’s and one notch below that of Mexico.
“The upgrade reflects Serbia’s improved economic resilience against shocks on the back of strong macroeconomic management, which we expect to persist in the coming years,” S&P said.
The move follows efforts by the biggest former Yugoslav republic to shore up public finances and catch up with its neighbors after years lost to war and strife. The candidate nation to join the European Union remains a speculative-grade credit at Fitch Ratings and Moody’s Ratings.
“We believe that resilient domestic demand, accumulated fiscal and external buffers, and prudent fiscal and monetary policies anchored by arrangements with the International Monetary Fund should allow Serbia to contain ongoing weakness in the euro zone and withstand possible future shocks,” S&P said.
S&P shifted its outlook on Serbia’s credit to positive in April, while Fitch and Moody’s followed in August, raising the prospect of the country soon gaining a trio of investment-grade scores and fueling a rally in the nation’s foreign-currency bonds.
Regional First
“We strived for this for almost a decade,” Serbia’s President Aleksandar Vucic said. “Serbia stands as the first Western Balkan country” with an investment-grade rating as well as the only EU candidate country with a non-speculative credit grade, he said.
The yield on Serbia’s latest dollar-denominated issuance, a note maturing in 2034, has dropped 70 basis points from a June peak to 5.63% on Friday. The country’s foreign debt has given investors 7% returns since the end of June, beating a 5.8% advance of Bloomberg’s EM Hard Currency index. Investors such as Morgan Stanley Investment Management have long said that Serbia deserved to be upgraded from junk status.
The country has come a long way from the chaos of the 1990s caused by armed conflict across the region and punitive international sanctions. It gradually recovered to reach one of Europe’s highest growth rates, with its $75 billion economy expanding 4.3% in the first half of 2024.
Long-serving Finance Minister Sinisa Mali has managed to keep the public debt at around 50% of gross domestic product even as the government ramps up infrastructure spending. Foreign direct investment exceeded $4.4 billion last year, largely covering Serbia’s current-account gap.
Investor ‘Favorite’
The upgrade comes despite Serbia’s recent decision to boost this year’s budget deficit to 2.9% of GDP from 2.2%. State revenues have been strong but the authorities are increasing expenditures on defense, agriculture, health care and social welfare for its 6.6 million citizens.
Nevertheless, Serbia remains beset by lingering political risks. It hasn’t joined Western sanctions against Russia even after condemning the Kremlin’s attack on Ukraine.
Also, the nation is yet to overcome hurdles on its path to potential EU membership, particularly its refusal to accept the 2008 secession of its former province Kosovo. Recurring tensions between the Balkan neighbors have led to occasional flare-ups and casualties.
The International Monetary Fund, which has a precautionary loan arrangement with Serbia, said in July that the country’s economy remains strong and called the government to continue reforms, notably to improve governance, strengthen institutions and overhaul large state companies.
The National Bank of Serbia, run by Jorgovanka Tabakovic since 2012, has also played its part in helping the country become an investment credit. The central bank has sought to wean the country’s financial system off foreign currencies — mainly the euro — and boost confidence in the dinar, while building the country’s foreign-currency reserves to a record €28.1 billion ($30.8 billion) at the end of July.
„Over the past decade, we have been restructuring and strengthening the foundations of a shaky economy,” Tabakovic told Bloomberg News. “We built a new and stronger country that has become one of the favorite investor destinations in this part of Europe.”
--With assistance from Selcuk Gokoluk and Mark Sweetman.
(Updates with comment from Serbia’s president, central bank chief, from paragraph six.)
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