Credit squeeze to hit Serbia

Some financial trouble may lie ahead for Serbia.

The outgoing IMF chief, Rodrigo Rato, says that the ongoing credit squeeze will force governments worldwide to make substantial changes to their budget plans. Rato says that countries with large current account deficits would be much more vulnerable to the tightening of availability of credit than those in a “more balanced situation”.

Rato warned of the coming financial panic in the credit markets back in February of this year.

Meanwhile, EBRDs chief economist, Erik Berglof, singles out five countries with high current account deficits that will “come under pressure at some point”. These countries are Latvia, Hungary, Bulgaria, Romania and Serbia.

Serbian Trade Deficit 1997-2000. Source: Serbian Central Bank

“Bulgaria, Romania and Serbia have also enjoyed very rapid growth and credit expansion and have benefited from large inflows of foreign direct investment (FDI). The main effect of the crisis in the West will be the reduced appetite for risks in emerging markets, which means that countries representing a higher level of risk or which have large external financing needs will be the most affected,” says Berglof.

In other words, countries with large trade deficits, like Serbia, have a net outflow of money out of their country and their foreign purchases are paid for with foreign direct investment which will likely decrease as the cost of borrowing increases.

Link Via - serbianna.com