Strong start, but the worst is yet to come
The multitude of investment projects in the pipeline, carry-over effects and minor exposure to tourism stand out as key reasons behind Serbia’s economic resilience to the COVID-19. The first GDP release landed at 5% y/y, confirming expectations of a strong start in 2020, as Serbia even managed to top the ladder in Europe. Still, with a forecasted double-digit decline in 2Q, it will be hard to avoid a contraction. Overall risks seem balanced now; we hence confirm our GDP forecast at -2.3% y/y.
Due to the COVID-19 negative impact on domestic demand and low global commodity prices, notably oil, we expect inflation to stay below the lower bound of the target range this year, before bouncing back in 2021.
Fiscal and monetary policy have been in sync recently, as the NBS provided ample liquidity through rate cuts, repo and swap operations, while fiscal authorities responded on time with a comprehensive package worth 11% of GDP. With the recent EUR 2bn euro bond tap, financing needs for the year are largely met and any further international issuance is dependent on yield developments on global markets.
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 8% of GDP budget deficit.
As the virus outbreak is largely contained, upcoming general elections and the potential resumption of Serbia-Kosovo talks are again taking over the headlines.