S&P Global Ratings on Dec. 16 revised its outlook on Serbia to positive from stable and affirmed the country's long- and short-term foreign- and local-currency sovereign credit ratings at BB-/B.

The outlook revision reflects Serbia's improved fiscal performance and the prospects for further gains. The rating agency projects that the Serbian government will end 2016 with a fiscal deficit at 2.2% of GDP, down from its previous forecast of 3.2%.

The Serbian economy also saw a continued recovery through 2016, with real GDP expected to grow 2.7%, driven by investment inflows. S&P noted that credit losses continue to weigh on Serbian banks' profitability and constrain lending to the economy, with data from the central bank showing that nonperforming loans accounted for 19.2% of total loans at October-end.

The positive outlook reflects a one-in-three chance that S&P would raise Serbia's ratings during the next 12 months if the government overperforms on its fiscal metrics while keeping its current account deficit in check.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.