Fixed-income investors are giving the benefit of the doubt to an opaque protest force which won power in Serbia on a pledge to root out corruption and strengthen democratic standards. The sovereign's foreign-currency bonds, which straddle the investment-junk threshold, jumped on the result. The yield on Serbia's dollar bond maturing in 2036 dropped 12 basis points to 6.44%, touching a one-month low.
While the Student List, a group formed from backers of mass anti-government protests, is yet to disclose its candidate for prime minister or specify economic policy proposals, its victory offers a clean break from Aleksandar Vucic, who dominated the Balkan nation's politics for over a decade. The ballot result "presents a clear near-term positive for markets" with the anti-corruption and reform platform offering a solid narrative for investors without yet providing too many clear policy details, according to James Wilson, emerging markets analyst at ING Bank NV in London. A "clean transition of power" with Vucic conceding defeat 90 minutes after polls closed removes another potential area of concern for investors. "Fiscal policy is an area to keep an eye on, while overall some level of policy continuity seems likely," he added.
The political shakeup puts the $100 billion economy on an uncertain footing as it's not clear whether the untested Student List can be as successful in running the country as it was in protesting against Vucic. The new administration is likely to give more attention to accountability, transparency, the rule of law and anti-corruption measures, said Mauro Giorgio Marrano, a senior economist at Uni Credit SpA. "On economic policy, the movement has generally signaled support for an open, market-oriented economy, although the campaign offered relatively limited detail on specific economic measures," he said. The movement's program suggests continuity in macroeconomic and foreign-exchange stability, with stronger emphasis on institutional reform and fiscal transparency, according to Ljiljana Grubic, chief economist at Raiffeisen Banka AD in Belgrade.
More selective incentives for foreign direct investments and the development of the domestic private sector are also likely priorities. Investors eked out a 0.6% return on Serbia's dollar bonds so far this year, compared with a 0.8% drop of the Bloomberg EM USD Aggregate Total Return Index. The Belgrade Stock Exchange's key BELEX15 gauge dropped 0.5% so far this week, trimming its year-to-date gain to 7.5%.
The dinar, tightly managed by the central bank, was little changed on Monday and Tuesday. It's trading 0.2% weaker against the euro compared with a year ago. Initial implications for the dinar appear "broadly neutral to positive" with the existing foreign-exchange framework expected to stay largely unchanged.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing