Another round of early elections?
The Serbian economy showed moderate improvement in 2Q23 but growth remained relatively sluggish in y/y terms. The household consumption decline deepened, while despite mild growth in investments, another quarter of strong destocking activity means domestic demand again weighed on growth. The outlook for 2H23 remains constrained, as high inflation, rising interest rates and ongoing geopolitical conflicts continue to press on business and consumer sentiment. We see no reason to change our FY23 GDP forecast (1.6% y/y).
Inflation peaked in March at 16.2% y/y, but normalization since has been underwhelming, with the latest figure in July at 12.5% y/y. We expect inflation to continue to decline, driven by base effects in energy and transport prices, diminishing food pressures after normalization on global commodity markets and a solid local agricultural season.
In September the NBS opted to curb inflation further through withdrawal of part of excess dinar liquidity by raising the reserve requirements. NBS projects roughly RSD 115bn of excess liquidity will be withdrawn thus still leaving banks with more than enough ammunition for regular credit process. In our view, the NBS will keep the key rate unchanged at 6.5% until the end of the year.
A silver lining stemming from high inflation is the outperformance on the revenue side of the budget. Due to the abolishment of the previous temporary regulation of excise prices and robust growth in corporate income tax, the MoF is proposing to lower the budget gap by 0.5pp of GDP to 2.8%. We deem the plan credible and achievable.
According to recent statements from president Vucic, we could see another round of early parliamentary elections already in December.