Serbia downgrade may fuel calls for election

Fri Jan 17, 2014 11:12am GMT

* Fitch downgrades Serbia from BB- to B+

* Cites high deficit, delayed reforms

* Blow may fuel calls for early election

By Aleksandar Vasovic

BELGRADE, Jan 17 (Reuters) - Serbia's Finance Ministry said on Friday it would insist on the implementation and broadening of economic reforms, responding to a ratings downgrade by Fitch that will feed into calls by some in the government for a snap parliamentary election.

The agency said it had cut Serbia's long-term local and foreign currency ratings from BB- to B+ with stable outlook, citing a rise in the country's consolidated budget deficit to 7.1 percent of output and delays to much-needed reforms.

The downgrade, nudging Serbian debt deeper into the speculative category, comes with the largest party in the ruling coalition, the Serbian Progressive Party (SNS), within days of a decision on whether to force an early election in March.

With the SNS riding high in opinion polls, some party officials say they need a new, stronger mandate to pursue painful economic reforms and a high-profile graft campaign. The last election was in May 2012.

Responding to the Fitch report, the Finance Ministry said in a statement: "The ministry will insist on the diligent implementation and broadening of reforms to lower the fiscal deficit and public debt and to secure growth."

The ministry is led by 29-year-old Lazar Krstic, an SNS appointee who has advocated an overhaul of Serbia's bloated public sector and pension system.

But legislation proposed by the Economy and Finance Ministries has been held up, with resistance from unions and, some SNS officials argue, from the co-ruling Socialists of Prime Minister Ivica Dacic and his Pensioner Party allies.

The government's 2014 budget ducked the harshest measures, fuelling speculation that the SNS has an eye on an early election and then a budget revision to help secure a new precautionary loan deal with the International Monetary Fund.

Announcing the downgrade, Fitch wrote: "Policy credibility continues to be affected by delays in fiscal consolidation and a weak track record of structural reforms."

The government, it said, "has yet to demonstrate the political resolve necessary to implement unpopular structural reforms".

It noted that an election in March would offer the government "new legitimacy" to implement unpopular structural reforms that may drive up unemployment currently at 20.1 percent, according to the state Statistics Office.

Serbia is targeting 1 percent economic growth in 2014, following an expected 2 percent in 2013.

Timothy Ash, head of emerging markets research at Standard Bank, said the downgrade may explain a surprise decision by the Serbian central bank on Thursday to keep its benchmark interest on hold at 9.5 percent, halting a run of cuts.

"The silver lining on this now is that this should focus politicians' minds over the need for deep and meaningful reform, and I still think the SNS will go to the polls in March, which will see a ramping up of reform momentum in the second half of the year," Ash said.

The Serbian daily Politika, citing multiple government sources, reported on Thursday that a parliamentary election would be called at end-January for March 16. SNS officials say they will decide on Jan. 25 whether to go to the polls. (Editing by Matt Robinson and Alison Williams)

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