Dear Clients,
The first two months of the new year are already behind us. Some would say that this has been sufficient time in order to gain an understanding of how the market would develop throughout the rest of the year. One thing is certain though - this season’s flavour is called government debt.
Investors have for a long time been looking at Serbia for attractive yields on its government securities and there has been a sustainably strong appetite for local currency denominated instruments. The high demand for Serbian dinar debt, often up to two times more than the supply, is now making this source of liquidity for the Serbian government cheaper as compared to last year. Apart from local institutional investors, a great portion of these securities is held by foreign ones. For the time being, the maturities of local currency government debt available to foreign investors are 53 weeks, 18 months, 24 months, 3 years and 5 years. In February, in addition to the local issues, a USD 1.5 billion 7-year Eurobond was placed to international investors with a yield of 5.15%. This was the third placement in the period between Q3 2012 and Q1 2013, aimed at replacing the more expensive previously issued London club debt.
One of the main reasons contributing to the oversubscription of government debt auctions is the recently implemented set of fiscal measures. The fiscal consolidation programme consisted of numerous measures (e.g., a VAT increase from 18% to 20%), some of which were aimed at stimulating tax debtors to pay debt principal by preset deadlines in return for writing off the due interest.
Please let me take a moment to remind you that in the last quarter of 2012 the government also dealt with the taxes related to financial instruments – amendments to the Law on Corporate Profit Tax, in effect since 25 December, 2012, introduced higher withholding tax rates on income earned by residents of the so called preferential tax system jurisdictions and prolonged the reporting period related to capital gains tax for all non-resident legal investors without a permanent business establishment in Serbia from 15 to 30 calendar days following the settlement date.
Changes to the Law on Personal Income Tax also increased the standard withholding tax rate and capital gains tax rate from 10% to 15% as of 8 October, 2012. On a more positive note, securities that have been permanently held by private investors for no less than ten years are now exempt from capital gains tax.
Concurrently, the regulatory focus on the implementation of AML standards and meeting KYC requirements by all market participants has had an increasing importance. Despite the large scope of local entities obliged to implement high AML standards in their daily activities, traditionally banks have been the ones taking this more seriously than anyone else – and this should definitely come as no surprise, knowing the intensity of the supervision the banking industry is exposed to. Nowadays though, we witness regulators determined to make sure that investment firms, funds and fund managers, insurance companies and other institutional players do not fall behind. Besides the greater intensity of supervision, it is clear that the regulatory demands put in front of market participants when it comes to documentary requirements related to client identification and risk assessment will not diminish - quite the opposite.
This process, however, should not neglect the introduction of important international practices such as third party identification, reference to electronic sources of information, etc., which can make it more efficient for local market participants and less painful for their clients.
Best regards,
Jasmina Radicevic
Head of GSS Serbia