Positive outlook for the new government despite numerous challenges
Overview:
Serbian financial markets have reacted favourably to the victory of the pro-reform, EU-oriented DS in May parliamentary elections and the fairly rapid formation of a governing coalition around it. The new government has promised to ratify the Stabilisation and Association Agreement (SAA) already signed with the EU, to further compliance with the International Criminal Tribunal for Yugoslavia (ICTY) and to accelerate the implementation of structural reforms. Fulfilling some of these tasks will not be easy. Moreover, the new government has won power on the back of some significant fiscal pledges that will further challenge the central bank’s inflation targeting credibility. However, the more favourable political outlook and pro-EU policy orientation should facilitate continued significant investment inflows and high growth rates.
Local currency recommendation:
We are overweight on Serbia. With inflation already well above target the central bank will have to keep domestic interest rates high. The dinar will likely remain strong given this and a balance of payments surplus making local deposit rates attractive.