Serbia calls on IMF, UAE for support as borrowing costs soar

Serbia has turned to the International Monetary Fund and the United Arab Emirates for help in dealing with its soaring debt costs, a move that underscores the impact of high interest rates and a recession on emerging markets in Europe.

This International Monetary Fund It was confirmed to the Financial Times on Tuesday that Belgrade had called for discussions on so-called back-up arrangements. Such an arrangement would allow Serbia to tap IMF support if Belgrade is unable to sell its bonds to investors.

Authorities hope the fund’s guarantees will prevent further increases in the country’s borrowing costs in international markets, which have more than doubled from less than 2 percent to more than 6 percent since the start of the year.

“If you’re a stable country, you don’t want a stand-by arrangement with the IMF, but maybe it’s better to eat the humble pie now to make sure you don’t refinance more than 6%,” said Tamara Basic Vasiljev, Oxford Economics Senior Economist at the Institute.

The IMF’s request comes after Abu Dhabi offered Serbia a $1 billion loan at 3 percent. “If we enter the financial markets, our costs are at least two and a half times higher,” Serbian President Aleksandar Vucic said in a statement on Monday, adding that Belgrade was facing “resistance from all.” investors, because it is mainly Western financial investors”.

Serbia It is one of several countries in Central and Eastern Europe, including Hungary and Romania, whose borrowing costs have soared on the back of sharp interest rate hikes by the Federal Reserve and the European Central Bank.

The country’s most liquid euro-denominated bonds traded at a yield of 6.3 percent on Tuesday, compared with 1.8 percent at the end of last year.

While funding costs are rising across Europe, yields in riskier borrowers such as Serbia are soaring at a faster rate. Serbia’s yield gap with Germany has widened to just under 5 percentage points from 2.2 percentage points in January.

Credit rating agencies have warned Belgrade that its government and banking sector face funding risks due to the high proportion of foreign currency loans. The economic outlook has become more pessimistic. Its central bank believes a downturn in the euro zone, Serbia’s biggest trading partner, could weigh on growth, while the war in Ukraine has triggered inflation to rise to 13.2 percent in the year to August.

Serbia has also become more politically isolated from the rest of Europe since Russia invaded Serbia. Refused to join Western sanctions on Moscow. The European Parliament in its June report Serbia urged Belgrade to “reassess economic cooperation with Russia”.

Vučić, who was re-elected for a new term as president in April, insists on keeping diplomatic channels to Moscow open even as Serbia continues to angle for eventual EU membership.

Abu Dhabi is already a major investor in Serbia, with Emirati companies taking a stake in the national airline and developing a $3.5 billion mega-project on Belgrade’s Danube River.

Discussions with the IMF will continue in the coming weeks.

The IMF and Belgrade will assess economic and financial conditions, determine the size of the country’s overall financing needs and an appropriate policy response, the IMF said.

Serbia entered into a three-year, $1.2 billion stand-by arrangement with the fund in February 2015, but did not tap it.