ANALYSIS-Weak Serbian dinar not yet cause for alarm

* Central bank says dinar fall seasonal

* Slide due to fiscal expansion, energy costs, deleveraging

* Monetary action unlikely unless slide accelerates

By Gordana Filipovic

BELGRADE, Feb 3 (Reuters) - The Serbian dinar hit a new all-time low on Wednesday just short of 99 to the euro, but the central bank says the fall is seasonal and most analysts and officials agree the weakness rings no alarm bells -- yet.

The slide is a result of fiscal expansion, seasonal energy imports and stepped-up repayment of cross-border credits. But officials say the currency would have to lose up to 10 percent over a short period to prompt a monetary policy response.

"If the rate were to fall sharply, by let's say 5-10 percent during one quarter, that would create problems boosting the cost of debt repayments and leaving debtors little time to adjust," said Milojko Arsic, a central bank supervisory board member.

"In that case, yes, that would be a situation where one would consider a policy change," Arsic told Reuters.

A 10-percent fall in the Serbian dinar to around 105/euro in 2010 is a worst-case scenario the IMF and Serbia are using to test the resilience of the banking sector to lengthy recession.

The dinar's woes will be one of the topics authorities will discuss with an International Monetary Fund team that will visit Belgrade next week to review Serbia's economy.

In two months of pressure, the central bank has sold 427 million euros ($594 million) in 10 interventions just to meet companies' liquidity needs, but not to reverse the dinar's fall.

One of few freely floating currencies in Southeastern Europe, the dinar has lost 2.8 percent in just one month.

By refraining from halting the slide, the central bank may be sending a message no politician dares in an import-reliant economy: it's time to end the addiction to foreign investment and borrowing, and seek growth more through exports.

The implementation of a free-trade agreement with the European Union from this week could open new opportunities.

"This exchange rate level is a message to everyone who had made bad investment decisions in the past that there is a new price to pay for such mistakes," Jurij Bajec, economic adviser to the Serbian Prime Minister, told Reuters.

"The lower dinar is an incentive to exporters, but also a message to everyone else to adjust prices, cost and quality of their products," Arsic said.

OUTFLOWS

Until the fall of autocrat Slobodan Milosevic in 2000, hyperinflation, devaluations and currency re-denominations made the dinar a symbol of weakness. Stabilising the currency was one of the most successful reforms of democratic governments since 2001 and makes any weakening politically sensitive today.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

But years of a robust dinar, backed by strong investment and credits, seem to have come to an end with the global recession. The currency is now about 35 percent cheaper than 16 months ago at the outset of the global financial turmoil.

"This is a process of adjusting to some new levels, but eventually, the exchange rate will stabilise," Bajec said. "The overall situation is a bit less serious than this time last year, but the central bank will not give up its inflation targeting policy, which has been agreed with the IMF."

Only a year ago, Serbia was suffering from capital flight triggered by the financial crisis. With investors, creditors and depositors pulling out 2 billion euros in only three months, the dinar fell by 25 percent.

"Our problem is the capital account in the balance of payments," Bajec said. "It no longer shows such generous capital inflows of 3-4 billion euros a year."

The weak dinar could spell trouble both for banks, whose 70 percent euro-linked loan portfolio exposes them to high exchange rate risk, and their clients, due to a rising refinancing cost.

Jasna Atanasijevic, chief economist at Hypo Alpe Adria bank in Belgrade, said that stepped-up repayment of cross-border credits by the corporate sector and new bank sector short-term borrowing signalled some new challenges. "This is a totally new trend," Atanasijevic said. "It is not in the interest of banks to force their clients into problems, and there will be some refinancing of cross-border credits, but an extended period of capital outflows could exert pressure on the dinar and pose a new challenge to the central bank."

For the central bank's Arsic, keeping wages frozen and spending under control is the best Serbia could do in 2010.

"A gradual dinar depreciation is desirable considering the current account and trade deficits and foreign debt," he said. "But only if accompanied by weak domestic consumption."

MARKET VIEWS

In a January report, the IMF said Serbia's future policy easing would depend on the exchange rate of the dinar and that "high loan euroisation already weakens the traditional interest rate and credit channels, leaving the exchange rate channel as the main transmission mechanism for cuts in the policy rate".

Goran Saravanja, Unicredit's Southeast Europe analyst based in Zagreb, said the recent dinar weakness was not yet a worry.

"It's too early to talk about a long-term trend," Saravanja said. "We have forecast the dinar at 100/euro at end-2010. For the time being we see no risk of the exchange rate adjustment."

But Richard Segal of London-based Knight Libertas was cooncerned that the dinar had lost ground for four months during which the euro lost 4.5 percent of its trade-weighted value.

Another month or more of dinar falls could turn investor sentiment sour, he said.

"At that point, we might be inclined to turn negative toward the '24 Eurobonds, which otherwise have demonstrated unusually strong inertia around the par level since Sept. 2009," he said.

He was referring to Serbia's single, internationally traded dollar-denominated bond, issued to repay past debts to the London Club of commercial creditors. (Editing by Adam Tanner and Paul Taylor)