S&P 500 to review Serbia’s rating and outlook

This week in CEE

This week we will see September’s flash inflation in Poland, in Slovenia and Croatia, as well as in Slovakia among HICP releases for the Eurozone. In Poland, we expect inflation to remain stable, one week ahead of the central bank’s meeting. In Croatia, inflation should remain above 4% in September, but an increase of headline CPI should be expected as of October, when subsidies for gas prices fade out. Further, September’s manufacturing PMIs will be published for Czechia, Hungary, Poland and Romania. So far, flash manufacturing PMIs in Eurozone suggest some deterioration in sentiment. Other than that, industrial output growth in August will be published in Croatia and Serbia and performance of the retail sector will be released in Slovenia, Croatia and Serbia. Finally, on Friday, Fitch Ratings is scheduled to review Slovenia’s rating and outlook (we expect no change), and S&P will review Serbia’s rating and outlook. S&P granted an investment-grade rating to Serbia last year and we believe that Serbia will maintain the rating assessment. However, the outlook is endangered (i.e. a shift from stable to negative would not surprise us) due to ongoing political tensions and rising external imbalances. Moreover, if a new agreement is not reached shortly, sanctions against Serbian oil company NIS (initially scheduled on October 1, got delayed by at least a week) will take place. Sanctions would affect economic performance, fiscal stance and possibly monetary policy directions, adding to the rising risk profile of Serbia. &nbsp.

FX market developments

At the beginning of last week, CEE currencies were strengthening against the euro. Stability of rates in Czechia and Hungary was a local factor supporting lower levels for the EURCZK and EURHUF. Indeed, both central banks kept the key policy rate unchanged at last week’s meetings, sustaining the interest rate differential. Toward the end of the week, the trend changed, however, and the gains were reversed. All CEE currencies depreciated against the euro, and we see global factors (US President Trump announcing 100% tariffs on the pharmaceutical sector) behind such development. The EURRON, at 5.07, is driven by the unanticipated decision of the Constitutional Court to delay the ruling regarding second fiscal package compliance with the constitution. This week, Serbia’s rating decision on Friday will be a key event for local markets, as we see a probability of a negative outlook change.

Bond market developments

Bond market performance was mixed across the region, but overall volatility was quite contained. In Romania, the Constitutional Court delayed the ruling regarding the second fiscal package until October. Prime Minister Bolojan announced a shift of the budget deficit target for 8.4% of GDP in 2025 and the decline of the budget gap toward 6% of GDP. Romania can cover the funding of a wider-than-expected budget deficit this year, as demand for its local and foreign-currency debt remains elevated, according to Treasury Chief Stefan Nanu. He underlines that there is a “comfortable” funding buffer. The Ministry of Finance also plans to buy back some of its foreign bonds and replace them with new notes this year, in an operation that may also include raising fresh funds from international markets. Romania should get access to the RRF funds after November’s meetings in Brussels. Further, at this point, we do not see the delay in the Constitutional Court’s ruling as problematic for reaching the fiscal targets In Serbia, the materialization of the scenario of sanctions against Serbia oil company NIS would increase the strain on public finances and raise national debt. Moreover, the government will face additional budgetary pressures, not just from the loss of important NIS budget contributions, but also from the need to support industries most affected by energy disruptions. Last week, Romania and Czechia enjoyed solid demand during auctions. This week, only Romania plans the issuance of government bonds.        

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