Despite the recent 2.5pp cut in growth, the magnitude of disruption caused by the outbreak of the COVID-19 virus has prompted the need for further downside revisions. We now expect Serbian economy to contract by 2.3% y/y in 2020, basing our scenario on gradual normalization during the 3Q20.
Although in our baseline scenario the virus impact is seen as transitory, the effect of quarantine measures on this year’s growth are substantial, with the economy technically entering into a recession in the third quarter. Component-wise, momentum has shifted, as shutdown of domestic demand should lead to improvement of the external picture.
Recently we lowered our inflation forecast to 1% in 2020 due to projected weaker demand and the strong tumble in commodities, but stress upside risks in case of a prolonged supply shock. Likely anticipating disruption in real economy, NBS eased monetary policy with a 50bp cut in early March, following up with repo and swap operations to provide necessary dinar liquidity to markets. We pencil in another cut down the road.
The outbreak of COVID-19 calls for decisive action from the fiscal side. The Government presented a EUR5.1bn fiscal aid package (11% of GDP) focusing on tax reliefs to firms and direct contributions to affected workers. We have accordingly adjusted our budget forecast downwards accounting for both lower revenues and higher subsidies, and now expect to see a 5% of GDP budget deficit.
General elections that were scheduled for April 26 are postponed due to the Covid-19 outbreak, including parliamentary, local and elections in Vojvodina. We still expect elections will be held in late 2020. Election polls still indicate a landslide victory for incumbent coalition(s).