Energy crisis brings new challenges
Following the outbreak of the war in Ukraine, we cut our growth expectation to 2.5%, down from the 4%-alike expected before. The conflict in Eastern Europe will have an impact on Serbia’s exports, FDI, remittances and tourism revenues. Over the medium-term, growth is expected to revert towards 4% y/y dynamics.
Commodity prices started rallying even before the Russian invasion. High PPI inevitably spilled over to CPI. Pinpointing the exact timing of normalization is difficult, due to the constant threat of Russia potentially cutting off the gas supply for Europe. Still, in our baseline scenario, prices should peak during the summer and then decline.
In response to mounting inflation pressures, the NBS increased the volume and percentage of sterilized excess liquidity from the banking sector through repo operations, increased the average repo rate, while the key policy rate was unchanged until April, when it was increased by 50bp to 1.5%, followed by further 50bp hikes in May and June to 2.5%.
We project the fiscal gap to be wider than budgeted (4.5% of GDP vs. 3%), due to the slowing economic activity, inflation related support packages and likely additional subsidies and guarantees for SOEs in the energy sector.
Two months after the all-level elections in Serbia, the parliament has not been constituted, and, consequently, the new government not formed. Serbia’s president claims it will be in late July, at the earliest.