Growth forecasts slightly upgraded
The resilience of the Serbian economy so far can be contributed to its structure and the high share of the basic goods industry. Still, with forecasted negative growth in both remaining quarters, we continue to expect contraction for the year, albeit a smaller one. The overall risks now seem balanced; we hence slightly upgrade our 2020 and 2021 GDP forecasts to -1% y/y and 5% y/y, respectively.
After bottoming out in April (0.6% y/y), inflation picked up, stabilizing around the 2% y/y mark by mid- year. The initial low inflation was mainly due to the high base effect in vegetable prices, which disappeared in June, and low gas prices. Overall, inflation is still expected to remain stable and inside the lower part of the targeted band throughout the year, with 2020 and 2021 average CPIs expected at 1.7% y/y and 1.8% y/y, respectively.
After cutting the key rate by a total of 100bp YTD and safeguarding exchange rate stability, the NBS is now focusing more on spurring credit growth. Effectively, the NBS is subsidizing corporate credit and thus ensuring that the fallout from the crisis is contained. Meanwhile, the rate path ahead remains sensitive to external developments, the inflation outlook and stability of the exchange rate. Overall, we see the risks as balanced and expect the NBS to remain on hold for the rest of the year.
The consolidated budget gap after 7M20 stands at EUR 2.8bn (6% of GDP), due mostly to the 24.4% y/y rise in expenditures, while the revenue drop stands at an acceptable 5% y/y. As subsidies have practically tripled compared to the same period last year, reaching EUR 1.3bn, and with additional smaller relief measures in place for 2H20, the gap will be substantial this year. We expect a budget deficit of EUR 3.5bn, or 7.5% of GDP.
Only three parties entered the parliament following the June elections, which were again marked by a landslide victory of the ruling Serbian Progressive Party. A government has not yet been formed, with the legal deadline being November 3. There is some speculation on new(old) minister names, while most recent statements suggest the new government will be sworn in at the end of September. It appears that economic cooperation will spearhead the political negotiations between Serbia and Kosovo.