‘Serbia managed to dig itself out of a hole,’ was the statement by James Roaf, head of the International Monetary Fund’s Serbia team, following the announcement that the country successfully completed its $1.32 billion (£923 million) three-year reform programme, earlier this year.
The country’s evolution during this time has not gone unnoticed, with Rob Drijkoningen (pictured), co-head of emerging market debt at Neuberger Berman, holding a significant overweight position in his EMD Hard Currency fund at 3.14%, compared to its benchmark’s 0.71%.
‘Serbia has been close to a role model for reforms in the last three to five years. Despite its problematic relationships with the West, the country has really decided to follow an orthodox adjustment program, reining in its fiscal deficit, but also reducing the role of the state,’ he said.
Back in 2014, the country had the second largest deficit in Europe, which has turned into a surplus in 2017, while unemployment is near historic lows and falling.
‘They have been making the economy grow and addressing the big current account deficit they used to have,’ Citywire + rated Drijkoningen said. ‘One of the interesting things is that Serbia is likely to enter the local currency index. That is clearly a reward for the type of reforms they have done.’
He stated that politically, while the country continues to maintain relations with both the EU and Russia, it has embarked on a more Western-oriented approach by opening up its markets which has also helped drive down inflation to 1.4% and interest rates to 3%.
In Serbia, Drijkoningen believes taking exposure in hard currency dollars and euros is the best bet, however, he highlights that local currency debt, which is now more liquid, is also becoming more mainstream.
While Serbia may be the poster child for successful reforms, there are other countries where Drijkoningen has also taken overweight positions that are delivering on promised changes.
‘Current key overweight positions include countries in Eastern Europe, such as Croatia and Ukraine, where we see improving sovereign balance sheets and potential for rating upgrades. We also see room for spread tightening in reformers such as Argentina, Ivory Coast and Indonesia,’ he said.
Croatia, he explained, has been largely static for a number of years, however, two to three years ago it started to embark on a number of reforms, including fiscal consolidation plus labour and bankruptcy reforms.
‘Obviously it became a member of the EU a while ago, but it was a laggard in terms of growth. Over the last two years or so they started to grow on the back of some of those reforms. Tourism has also been up. It’s one of the few countries showing deleveraging of debt to GDP and that’s encouraging if you’re a debtholder.’
Croatia is the second largest holding in the hard currency fund, behind Argentina, which has also been a significant reformer in recent years.
‘In our EMD Hard Currency fund we have been overweight in Argentina for more than two years now. The economic reform trajectory that the administration of president Mauricio Macri has embarked on, including the removal of distortionary export taxes/subsidies, lifting of capital controls and the return to capital markets, has increased growth potential and driven credit rating upgrades,’ he said.
‘We see potential for more upgrades and tighter spreads still, but see most value in the Argentine bonds issued in euro.’
Unlike in Croatia and Serbia, the IMF has not been welcome in Argentina; however, since Macri’s election in 2015, the government has been focused on economic and social overhaul. While pointing out that the government is moving in the right direction, Drijkoningen admits there are still a number of issues.
‘One of the issues is it is running a sizeable deficit of 4.5% of GDP that needs finance. It remains reliant on portfolio flows to a fair degree. As long as reforms continue and there is an adjustment, the notion of keeping investors on board will continue. Growth has returned to 3.5%, which is not huge, but certainly it is a quite constructive backdrop for reforms to be paid for.’
The fund is up 8% and 22.5% over one and three years respectively, compared to the JPM EMBI Global Diversified index’s 4.39% and 18.27% rise.