Weaker growth due to external shock
Growth once again beat forecasts last year, coming at 4.2%. Meanwhile, the tide has turned as already stacked worries regarding the international environment are further aggravated with the outbreak of the Covid-19 virus and its impact on domestic demand. This prompted us to cut our FY20 GDP forecast by 2.5pp to 1.5% with risks still tilted downwards.
We lower our inflation forecast due to projected weaker demand and the strong tumble in commodities, but stress upside risks in case of a prolonged supply shock. Inflation should bottom out around mid-year and the slowly climb back in to the range. We have thus revised our inflation call downwards by 1pp to 1% y/y average in 2020, while FY21 average CPI is seen at 1.7%.
Covid-19 outbreak suggest a more cautionary monetary approach might be needed in the near term to prevent dinar outflows in case investors’ run to safety, as indicated in February when the CB sold a net EUR65m to ease dinar weakening. Interventions are likely to further intensify in March given the rate cut and Covid-19 outbreak, hence the EUR/RSD will be one of the key signpost to watch in the upcoming period.
This year’s parliamentary elections and expected transitory weakness in private investments suggest further loosening of the fiscal stance. We have accordingly adjusted our forecast downwards, and now expect to see a 2% of GDP budget deficit in 2020.
As it currently stands, general elections that were scheduled for April 26 are postponed due to the Covid-19 outbreak, including parliamentary, local and elections in Vojvodina. We expect elections will be held in late 2020. Campaigning will likely be characterized by two main themes: opposition calls for a boycott and strong international pressure on both Serbian and Kosovo authorities to restart negotiations and find a sustainable solution for the conflict.