Serbia’s recent auction of ten-and-a-half-year dinar-denominated state bonds exceeded expectations, with 111.3 billion dinars raised, nearly four times the planned 30 billion dinars. The yield of 5.25% was competitive, aligning with or below rates in Central European countries. The local bond market is also seeing positive trends, with yields on short-term government bonds ranging from 4.0-4.3% and those with maturities longer than five years between 4.6-4.8%.
On the international market, long-term euro-denominated bonds yield between 4.5-4.8%, and Serbia’s Eurobond maturing in May 2027 offers a yield of 3.6%. These trends are influenced by global monetary policies, particularly the US Federal Reserve and European Central Bank (ECB). After the pandemic, Serbia borrowed at rates below 2%, but rising inflation and the energy crisis led to higher interest rates in 2022. As inflation eased in 2023, the ECB began lowering rates, a trend Serbia’s central bank followed despite persistent domestic inflation.
Serbia’s economy grew by 3.9% in 2024, and GDP growth may accelerate. However, the projected budget deficit will rise to 3% of GDP, or around 2.7 billion euros. Interest expenses are set to increase by 20%, reaching 1.9 billion euros, and public debt could rise to 41.9 billion euros. The debt-to-GDP ratio is expected to remain stable.
The government is focusing on large public investments, which could reach 7.4% of GDP (about 6.5 billion euros). However, inefficient project selection and implementation outside current regulations could lead to non-productive expenditures.
Foreign direct investment (FDI) is showing signs of slowing down, with inflows rising to over 5 billion euros in 2024 but facing outflows due to dividends, interest, and reinvested profits. FDI projects are increasingly unsustainable due to rising labor costs and the potential for capital to relocate after tax incentives expire.
Domestic investments continue to grow but highlight Serbia’s challenges with the rule of law, corruption, and inefficient institutions. Despite Serbia’s recent investment-grade rating from Standard and Poor’s, ongoing systemic issues remain unresolved, contributing to declining foreign investment and fiscal challenges. The government’s failure to address these issues could lead to serious fiscal problems, which even the anticipated interest rate cuts in the Eurozone may not mitigate.
