BELGRADE (Reuters) - Serbia risks a debt crisis this year and next, with “uncontrolled” currency depreciation and rising inflation unless it urgently reins in spending and borrowing, the country’s top financial watchdog warned on Wednesday.
Serbia’s overspending has already led the International Monetary Fund to put its 1 billion euro ($1.25 billion) standby loan deal on hold. Without that support, the dinar currency has slide to record lows against the euro since rightist opposition leader Tomislav Nikolic’s shock defeat of pro-Western reformer Boris Tadic in presidential elections on May 20.
Political uncertainty in the wake of inconclusive May parliamentary election is also weighing on the economic outlook and finances, as parties horsetrade over a new ruling coalition that will tackle rising debt and deficit.
“Unless something is done, the deficit may increase to over 200 billion dinars (176.5 million euros) and reach 6.2 percent (of GDP) by year’s end, while the debt will be about 55 percent of GDP,” Pavle Petrovic, the head of the Serbian Fiscal Council, told a news conference.
“A debt crisis is possible in 2012 ... which may lead to uncontrolled depreciation of the dinar, rising inflation and a significant drop in living standards,” he said.
The Fiscal Council is an advisory and monitoring body appointed by the Serbian parliament. Serbia has already breached a self-imposed debt limit of 45 percent of gross domestic product.
The IMF says it will renew talks with the next government, but that could yet take weeks or even months to emerge.
The dinar on Wednesday traded at a new record low of 116.75 against the euro. On Tuesday, the central bank sold 69.2 million euros to defend the currency, taking its spending to more than 1.1 billion euros to halt the slide.
Nikolic will be sworn in as president on Thursday, when he will give the mandate to form a government to his own Serbian Progressive Party or to Tadic’s reformist Democratic Party.
Tadic has emerged as the most likely new prime minister, going some way to settling nerves in the European Union and the region that were rattled by the election of Nikolic, a former nationalist ally of late Serb strongman Slobodan Milosevic.
A Tadic-led coalition would also keep the country edging towards talks on EU accession.
The Fiscal Council said the next government would have to launch fiscal reform, freeze pensions and wages in the public sector and reduce subsidies and sovereign guarantees for state-run companies.
Petrovic said the deficit should be cut to three percent of GDP in 2013 to avoid a debt crisis.
“It’s necessary to cut the deficit by 1 billion euros in 2012 and 2013 and by an additional 1.1 billion euros to 1.2 billion euros from 2014 to 2016,” he said.
Serbia is currently borrowing through the sale of dinar and euro-denominated treasury bonds, but most auctions underperformed in 2011 and 2012 as investors cut back on exposure to emerging European markets amid the crisis in the euro zone.
Petrovic said that without austerity measures, Serbia would need to borrow an extra 2.5 billion euros by the end of 2012 to plug its budget gap and secure payments of matured loans.
The high deficit, he said, also generates a foreign trade gap and puts further downward pressure on the dinar which so far in 2012 has lost 8.21 percent against euro.
$1 = 0.7977 euros