Serbia: Growth remains upbeat despite gloomy external environment

The Serbian economy is currently performing better than its regional peers, thanks to a strong domestic demand boosted by a tight labor market, solid remittances inflow (7.1% of GDP), high real wage gains (9.3% y/y in 9M24), and a vivid investment activity as the country set in motion its 'Leap into the future 2027' investment program. These factors are expected to continue supporting the headline figure over the forecasted horizon.

After two years of double-digit inflation rates, price growth has finally more than halved in 2024. However, the average inflation for the year is likely to miss the NBS target band for the third straight year in a row. While headline inflation remains in check, core inflation is trending 1pp above headline since June, reflecting strong domestic demand pressure.

Monetary policy remain relatively cautious due to elevated global uncertainty, but also high core inflation. We expected gradual easing to continue albeit more pronaunced during the middle of next year.

To accommodate the need for higher public investments, Serbia has raised its medium-term fiscal ceiling to a deficit of 3% of GDP, but in agreement with the IMF. After a recent statistical GDP revision, the public debt ratio dropped below 50% of the GDP and should remain around the 47% of GDP mark in the upcoming years.

S&P's upgrade of the credit rating to IG status briefly shook up fixed income assets, but Eurobond movements again mostly hinge on core movements, while the domestic RSD curve is still burdened with (il)liquidity problems.   

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