Serbia’s credit was downgraded by the ratings company Fitch “due to fiscal slippage and sluggish growth, reports Gordana Filipovic for Bloomberg.

Serbia

Serbia’s national debt is currently 63% of its GDP, but that is expected to increase to 70% by 2015, while GDP growth is expected to stay below 2% per year. Fitch gave Serbia a B+ credit rating, down from BB-, which is below investment grade, but none of the information that Fitch highlighted in its report is news to analysts. The downgrade is unlikely to change the facts on the ground, since the interest rates that Serbia has had access to have most likely already priced these factors in.

Serbia boosts currency in response

The initial reaction to the news caused Serbia’s currency, the dinar, to drop by 0.3% as people started buying euros, but the country’s central bank stepped in and started buying dinars to support the currency. Serbia’s treasury department says that it has managed to stem the tide and bring some calm back to its currency market. The yield on Serbian bonds also increased 3 basis points following the news.

Downgrade follows central banks surprise decision

The decision comes one day after the Serbian central bank surprised analysts with the decision to keep its one-week repo rates steady at 9.5% when most expected a quarter to a half point decrease ,following five cuts in the last three quarters that have reduced the interest rate by a total of 2.25%. The central bank has a target inflation rate of 4% with a generous margin – plus or minus 1.5% – and while inflation is currently outside that band, it has increased from 1.6% to 2.2% and the Serbian central bank has said that it is confident inflation will reach the target range in the next few months, so that is no longer the mind consideration when setting the one-week repo rate.

“Even though inflationary pressures and inflation expectations have been significantly reduced, the executive board concluded that it’s necessary to pursue cautious monetary policy,” the central bank said. It cited the US Federal Reserve’s decision to begin tapering as one of the main risks that it has to pay attention to when setting its own rates.