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We collected some interesting views from respected analysts, regarding the statement that Deputy PM Alexander Vucic made yesterday. These views are covering a wide range, from surprise to positive reactions.
First analysis from RBS "Serbia not seen on the verge of bankruptcy"
Headlines from Deputy PM, Vucic, contained positive and negative comments. Let us start with the negative comments which the market mostly reacted to and which in fact we believe are not that negative... The negative comments and their context..Not on the verge of bankruptcy A host of comments from Deputy PM Vucic have caught the market's attention. His comment that the government is virtually on the verge of bankruptcy' has outweighed positive signals that a UAE loan is near and that the government may indeed cut public sector wages. We argue that the government is in fact not on the verge of bankruptcy, given considerable fiscal reserves. However, reserves are not sufficient to finance the government into year-end. Funding needs for the rest of the year, amounting to at least USD 1.7bn, imply that an external source of funding is required. In this note we cover Serbia's funding situation into end-2013, and discuss the implications of a potential UAE loan. Additionally, we consider how public sector wage cuts may finally open the door towards an IMF agreement.
-Serbia virtually on verge of bankruptcy' not our base case. The comment from Vucic which has mostly caught the market's attention is that Serbia is virtually on the verge of bankruptcy'. We do not think this is the case. oVucic comments difficult to reconcile with amount of available fiscal reserves. The Deputy PM's comments are difficult to reconcile with the fairly sizeable fiscal reserves that the central government has. According to latest central bank balance sheet data, as of end-August the general government had deposits at the central bank amounting to USD 0.78bn in local currency and USD 1.15bn in foreign currency USD 1.93bn in total. We estimate that these reserves fell to ~ USD 1.6bn in September. Note, however, that these figures include local government reserves, and accounting for the central government alone leaves the sovereign with reserves of USD 1.3bn This is not enough to get the government through the year, but it should imply that the government is in fact not on the verge of bankruptcy.
-At least USD 1.7bn of funding needs left for the year. Based on the August budget data, the central government's deficit reached 73.3% of the revised annual plan which envisages a deficit of RSD 178bn (~USD 2.1bn). Therefore, the government requires a further ~USD 0.6bn for budget financing. In addition, we estimate that the government requires ~USD 1.1bn for debt financing for the rest of the year, taking total government financing needs for the rest of the year to USD 1.7bn. Note that this is a best-case scenario, given the government is likely to overshoot its budget deficit. If the central government budget deficit is as high as we envisage (5.2% of GDP vs. government target of 4.7%), then the remaining amount needed for and hence total financing requirements for the year would be ~USD 0.2bn higher.
-Rating downgrades in near term. Vucic also raised the possibility of rating downgrades in the near term. This cannot be ruled out given Serbia's deteriorating budget and debt metrics. A rating downgrade would likely come from S&P or Fitch, given both rating agencies have maintained a negative outlook on Serbia and rate the sovereign one notch above Moody's, which has a stable outlook on the credit. Overleaf, we highlight the latest rating agencies' reports and the triggers for possible downgrades. Note that the S&P forecasts for 2013 are from November 2012 and are hence the least reliable. Our own forecasts are closest to Fitch.
-Domestic audience the target of alarmist sound-bites? We suspect that the Deputy PM's comments were targeted towards the domestic audience, amidst what appears set to be the imposition of nominal wage cuts on public sector employees as part of the 2014 economic measures. Undoubtedly, such wage cuts would be politically difficult to implement, especially on the backdrop of >7% inflation. By sounding the alarm of bankruptcy and rating downgrades, Vucic may be intending to soften any domestic opposition to harsh austerity measures if they are indeed to be adopted by the government.The positive comments and what they imply..•USD 1bn loan from UAE by year-end. Deputy PM Vucic said that he expects the government to receive a USD 1bn loan from the United Arab Emirates by end-2013, with the total amount of the loan possibly reaching as high as USD 2-3bn by end-2014. We raised the possibility of a UAE loan to Serbia as potentially game-changing for the Serbian credit. The terms of such a loan would be very favourable, if the USD 400mn loan from the Abu Dhabi Development fund is anything to go by. The terms of that loan include 25yr maturity, with a 5yr grace period and an interest rate of 2.5%.
-UAE funds to precede external issuance. While our estimates of Serbia's fiscal reserves imply that bankruptcy is not imminent, our estimates for remaining financing needs lead us to conclude that Serbia does need external funding if it is to get through to the end of the year. The Deputy PM's comments do not help the sovereign's prospects of being able to issue externally, although we think the international debt market is not shut towards them. We believe they can come to the market, but will most likely have to pay a heavy new issuance premium. Alternatively, Serbia may wait for the arrival of the UAE loans which should calm market nerves and help tighten the credit spread. At that stage, even though Serbia would not need external issuance to finance itself into year-end, it is very likely to do so to pre-finance for 2014.
-Local issuance to make-up for external funding as worst-case scenario. So far this year, Serbia has raised USD 2.4bn in RSD- denominated debt in the local market, of which USD 2.0bn has had maturity of greater than 1yr. Therefore, we believe the local market can also be used as a source of financing, if all else fails. However, the set of poor local auctions over the past few weeks implies that resorting to this would be undesirable for the government.
-USD 24s won't get called in November, even with UAE loan, and despite Vucic comments. Given Serbia's financing woes, calling the remaining USD 400mn of the USD 24s remains off the table, in our opinion see Trip Notes | Serbia In need of an anchor, 28 June 2013, for why we viewed it to be off the table from June. Amongst the rest of his comments, the Deputy PM said that Serbia would use USD 500mn from the UAE loan to retire some old debt. Naturally, that raised the possibility of the USD 24s being called, as was initially the government's plan earlier in the year, before it got ruled out on the back of the summer sell-off. We think May 2014 and not 1 November 2013 provides the next possibility for calling the USD 24s. This is for two reasons: i) the transfer of the UAE funds is unlikely to be completed in time for the authorities to call the bonds on 1 November; ii) calling the USD 24s requires a 30-day notice. Given the next call date is the 1 November, the government cannot fulfil its notice period.
-Public wage cuts to save EUR 0.2-0.3bn. Vucic also said that his government intends to cut public sector wages to save EUR 0.2 to EUR 0.3bn per year. However, Vucic emphasised that there will be no cuts in pensions, and they will remain indexed as envisaged in the amended 2013 budget. Recall that the 2013 budget amendment stipulates the indexation of pension payments by 0.5% in October 2013, 0.5% in April 2014 and 1% in October 2014. This would still represent a painful cut in real wages and pensions, with inflation remaining elevated at >7%.
-Tick in the IMF box. If the government goes ahead with an actual nominal cut in wages, it would have met one of the IMF's key conditions for loan negotiations although we do not have much information about the extent of cuts required by the IMF. The IMF had also required cuts to pensions which look like they won't materialise but the international lender may show flexibility given the difficult political backdrop. Wage cuts make an IMF deal in Q1 2014 more likely.
* Vucic comments positive, on balance. Sell-off unwarranted. Use dip to buy. In light of the above, we believe that Vucic's positive comments (UAE loan and public wage cuts) are more material than his alarmist comments (rating downgrade and being on verge of bankruptcy), the latter of which we view as primarily aimed at his domestic audience. Therefore, we believe today's sharp sell-off is unwarranted and suggest using the price action as an opportunity to buy the credit. We maintain our overweight Serbia vs. Hungary USD 21s trade idea see Serbia | Time to give it a second look, 4 September 2014, for trade initiation.
Second analysis from Standard Bank: "Serbia: Vucic says he expects credit rating to fall near term"-
Of all the comments from Vucic this morning, this is the most inexplicable and damaging. With the sovereign set to come (or try) to come to market over the next few weeks, it is difficult to understand why he would make such comments - unless the rating agencies had already given the nod. On that note, we did not sense from our meetings last week in Belgrade that ratings downgrades were that imminent, but if Vucic continues to talk in this fashion, they will be! Not sure who is advising him - where is DSK when u need him - but he needs better advice on how to brief the market than this. This shows a lack of market experience, even though all this is probably aimed at selling the need for fiscal consolidation this side of elections to the domestic audience. The latter efforts are actually encouraging.
Serbia to try to sell Telekom Srbija for EUR1.5bn-2bn
"Try" is the operative word there...it is good they are trying to sell the company, to generate much needed cash to fill (or refill) the state's coffers, but given previous failed bids, I struggle to see the sale price getting anywhere near to this figure...unless the company strikes oil - maybe via Abu Dhabi!
Third analysis from Teneo: "Serbia deputy PM insolvency statement to mitigate resistance to reforms"
While Serbia's finances are, indeed, in dire straits, Deputy Prime Minister Aleksandar Vucic's (Serbian Progressive Party, SNS) statement on almost imminent bankruptcy is aimed at the domestic audiences, as he strives to limit resistance to forthcoming painful reforms.
As we expected in our research note from 9 September, the government decided to tackle the budget deficit by cutting expenditures of Serbia's oversized bureaucracy and SOEs. This will likely mean across-the-board wage cuts as well as redundancies due to the restructuring of state owned enterprises. Wide spread protests and systemic resistance present a risk to the implementation of the intended reforms, and Vucic's statement is to be understood as an attempt to mitigate it. Details of the planned reforms are due to be unveiled tomorrow at a public cabinet meeting.
In the meantime, Serbia's financial situation is getting increasingly precarious, but the current resources seem sufficient to carry the country over into 2014. The finance ministry is now preparing the USD 1bn bond issue announced in September. In this context, Vucic's choice of the words 'bankruptcy' and 'insolvency' was unfortunate.
The statement of the International Monetary Fund on Serbia is also expected tomorrow after the spending cuts announcement. The new finance minister, Lazar Krstic (independent, on behalf of SNS), aims to restart talks with the IMF in early 2014. Curbing the budget deficit is a precondition for the renewal of the relationship with the fund, which broke down over unfulfilled fiscal promises in 2012. Given the fact that the budget proposal has been discussed with the IMF's technical mission last week, the fund's statement is likely to be positive.
While waiting for the IMF's backing, the government is keen to broadcast the message on a credit line likely to be extended by the UAE. The Gulf country promised to lend Serbia up to USD 3bn over the next 18 months, with the first tranche of USD 1bn expected before the end of this year.
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