Bosnia-Herzegovina Business Forecast Report Q1 2009

Outlook Still Positive, But Bosnia Is Lagging

In the latest Bosnia-Herzegovina Business Forecast Report we examine the countrys political and economic outlook heading into 2009. In the medium term, we believe Bosnia will be unable to avoid the knock-on effects from the ongoing slowdown in eurozone economic activity, and as such, expect real GDP growth to slow to 5.0% in 2009, down from 5.8% in 2008. That said, over the long term, we believe Bosnia will maintain relatively robust rates of growth, and forecast real GDP growth to average 5.9% between 2010-2013. Underpinning our view is our belief that the country will become an increasingly attractive destination for Greenfield investment. The Q109 Bosnia-Herzegovina Business Forecast Report also highlights the beneficial impact that the ongoing correction in the prices of global soft commodity and energy prices will have on Bosnias economy over the medium term, particularly as this will help moderate headline inflation and drive the narrowing of the countrys current account deficit. That said, we also highlight the underlying risks to Bosnias political and economic stability posed by the ongoing tensions among the countrys ethnic-nationalist politicians.

Bosnias political climate continues to be characterised by heightened tensions between the political leaders of the countrys two sub-state entities. We are particularly concerned about how these tensions will affect Bosnias ability to continue fulfilling its obligations on its path towards the European Union (EU). Indeed, we maintain our core view that the countrys progress on meeting its targets set by the EU following Sarajevos signing of a Stabilization and Association Agreement (SAA) in June will continue to be slow. Furthermore, we are also concerned about the overwhelming success of the countrys ethnic-nationalist political parties in the October 3 local elections, which we see as evidence of ongoing tensions between the countrys predominant ethnic constituencies.

We maintain our positive outlook on Bosnias external debt dynamics. Although we expect the countrys total debt pile to increase over our five-year forecast period, we expect any further accumulation in foreign liabilities to be both gradual and sustainable. Our positive outlook on Bosnias external debt dynamics is underpinned by the governments apparent willingness to begin actively reducing its foreign liabilities. Indeed, on October 3, Milenko Krajisnik, the assistant to the finance minister in the Republika Srpska, proposed that the CBBH consider repaying Bosnias foreign debt to the London Club group of private creditors ahead of schedule. As the conditions for Bosnia to borrow on international capital markets remain less than encouraging, the main driver behind the rate of future debt accumulation will continue to be from increased financing from international organisations.

Bosnias business environment will continue to be weighed down by underlying structural problems, particularly the persistence of endemic corruption. Largely a factor of the countrys overlapping and confusing regulatory environment, opportunities for corruption abound. Unfortunately, the situation has only become worse as of late, highlighted by Bosnia falling to 92nd out of 180 countries rated in Transparency Internationals 2008 annual Corruption Perceptions Index, down from 84th a year earlier. Furthermore, in the World Banks recently released Doing Business 2009 Report, which compares the ease of doing business across 181 economies around the globe, Bosnia now ranks 119th, two spots lower than last year.