New Serb finance minister says has political support, investors unsure

Reuters News
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Posted: Aug 15, 2013 10:37 AM

By Ivana Sekularac and Matt Robinson

BELGRADE (Reuters) - Serbia's incoming finance minister, a 29-year-old McKinsey consultant with little political clout, said on Thursday he was determined to reverse the "negative spiral" in which the country's economy was trapped.

Addressing doubts among investors over whether he has the heft to take on the Socialist wing of the ruling coalition, Lazar Krstic told Serbia's state broadcaster he expected full backing for his vision.

He did not expound on his program, but reports said it may involve a return to the International Monetary Fund for support and a renewed effort to cut spending on pensions, bloated state firms and public sector jobs.

That seems almost certain to set up a showdown with the Socialist Party of Prime Minister Ivica Dacic, the junior partner in the coalition and which has resisted unpopular belt-tightening designed to rein in a ballooning budget deficit.

Krstic, whose appointment was confirmed late on Wednesday, was head-hunted by the biggest party in the coalition, the Serbian Progressive Party, and its leader, Deputy Prime Minister Aleksandar Vucic.

"This is what I have recognized in Mr Vucic, that there's a positive attitude and sincere determination to change the course and the negative spiral of the Serbian economy in recent years," Krstic told Radio-Television Serbia.

"I expect full political support."

The IMF, which froze a previous standby loan deal with Serbia early last year, and the country's fiscal advisory body have warned the government risks missing its revised budget deficit target of 4.7 percent of national output.

Public debt is on course to hit 65 percent of gross domestic product (GDP) this year, higher than the IMF recommends for other similar emerging economies.

Investors are unconvinced by the coalition's ability to stabilize Serbia's finances, doubts that have driven up borrowing costs and kept the dinar currency under pressure.

POLITICAL CALCULATIONS

Serbia emerged from recession in the first quarter but needs to borrow a further 2 billion euros ($2.65 billion) this year and around five billion in 2014 to cover the budget gap.

Dacic's Socialists have resisted radical structural reforms that may dent their support. Vucic's Progressives, on the other hand, are riding high in opinion polls.

"The new finance minister will have to carry out some serious reforms, and the ruling parties will pay the price," said Vladimir Gligorov of the Vienna-based Institute for International Economic Studies.

"Vucic and his party ... can afford to lose some voters, but the Socialists cannot."

Dacic will present his reshuffled cabinet to parliament on Aug 26. Krstic will replace Mladjan Dinkic, who was ousted along with his small United Regions party in a cabinet reshuffle late last month.

A graduate of Yale and an associate at global consultancy firm McKinsey & Company, Krstic brings no experience in government or any political weight.

He will rely on the support of Vucic, the driving force behind government policy.

"The question is will Krstic have sufficient political capital/drive to counter opposition from the SPS (Socialists) and PUPS (Pensioners Party) to force through reform - this perhaps underscores the importance of the government now quickly securing an IMF agreement," Timothy Ash, head of emerging markets research at Standard Bank, said in a note.

"Indeed, given the weak/inexperienced position of Krstic we think it is vital for Serbia to quickly sign up to a new IMF program to provide sufficient assurance to investors." ($1 = 0.7538 euros)

(Additional reporting by Aleksandar Vasovic; Writing by Matt Robinson; Editing by John Stonestreet)