Serbia rating to improve on resumption of EU talks

Standard & Poor’s Ratings Services said that the EU’s decision to resume talks regarding the potential integration of the Republic of Serbia (BB-/Positive/B) into the EU, after a year’s delay, is supportive of the sovereign rating. The rating remains constrained, however, by political risks stemming from the pending decision of the UN Security Council on the status of Kosovo and by the risk that the new government will not pass and implement a broadly balanced 2007 budget.

The EU’s decision to resume the Stabilization and Association Agreement (SAA) talks is the result of improved cooperation by a new reform-oriented government with the International Criminal Tribunal at The Hague. The SAA talks have been suspended since May 2006 due to the failure of the Serb authorities to apprehend war crimes suspect Ratko Mladic.

In the short term, the EU’s decision to resume talks will reduce political pressure on the new government, which is already facing challenges relating to the unresolved status of Kosovo. The response of the government to the political pressures surrounding Kosovo’s final status will be a crucial factor for the rating trajectory in the next six months to 12 months.