Bosnia-Herzegovina Infrastructure Report Q1 2009

The 1992-95 war left Bosnia's road and railway infrastructure devastated. Bosnia's highway network currently stretches for a mere 30km across the country, significantly impacting on inter- and intracountry transport, and consequently trade and economic expansion. However, change is on the horizon. In October 2008, according to Reuters, Bosnia's Serb Republic parliament has approved a delayed EUR3bn deal with Austrian builder Strabag to construct 430km of road network. Additionally, the European Bank for Reconstruction and Development (EBRD) has finalised a loan of EUR180mn to Bosnia- Herzegovina to build key sections of the Trans-European Corridor Vc. The EBRD loan is part of a EUR480mn investment in the priority motorway sections of Corridor Vc, a key transport artery linking Bosnia-Herzegovina with the rest of Europe, which will be partly financed by the European Investment Bank (EIB). Corridor Vc starts in Budapest, Hungary, and ends in the Adriatic port of Ploce, in Croatia.

All told, the picture that emerges of Bosnia's road and rail network is roughly transposable to other key infrastructure sectors including construction and energy; namely, that they been significantly impacted by war, are consequently generally underdeveloped, and that opportunities and financing exist for established infrastructure companies and new entrants. Current notable participants include Grupo Isolux Corsan SA, Danieli Group, Enka Construction & Industry Co. Inc., FCC, Fomento de Constr. y Contratas SA, Granit Construction Stock Co., KB, Obrascon Huarte Lain SA, the aforementioned Strabag and Vinci.

Bosnia is one of the few emerging Europe markets, whose construction and infrastructure industry value will remain in positive territory throughout BMI's forecast period. In BMI's Q109 Bosnia Infrastructure Report we forecast that the industry value real growth will be 0.6% for 2009. However, the reason why it will remain positive is because the market value is so small, a mere US$670mn in 2008, that any small change will gave a big impact in terms of percentages.

Bosnia's political climate continues to be characterised by ongoing tensions among the country's major ethnic groups. While these poor relations have so far failed to re-manifest themselves into scenes of interethnic violence, they have nevertheless caused a near paralysis of policy-making inside national level government institutions. We maintain our core view that divisions among Bosnia's political leaders will continue to retard policy-formation, thus slowing the country's progress towards European Union (EU) membership. Indeed, our negative outlook on Bosnia's political climate is reflected in the country's low score of 46.7 out of 100 (with higher ratings indicating a more positive outlook) in our short-term political risk ratings. Going forward, we believe the country's efforts at greater integration with euro- Atlantic institutions, in addition to its underlying longer-term stability, will in large part be determined by the policies and rhetoric of ethnic-nationalist political leaders at the sub-state entity level.

Turning to the prevailing economic conditions, we believe the ongoing slowdown in eurozone economic activity, combined with the continuing deterioration in global credit markets, are set to negatively impact Bosnia's growth potential in the medium term. Going forward we expect real GDP growth to slow to 5.0% in 2009, down from 5.8% in 2008. That said, compared to our forecast that sees eurozone growth crawling along at 0.2% and 1.6% for the same time period, respectively, Bosnia is set to be a relative outperformer compared to its regional peers. Indeed, we expect the country to maintain relatively robust rates of growth through our forecast period, particularly as the expected recovery of the eurozone in 2010 feeds through to the Bosnian economy. As such, we forecast Bosnian real GDP growth to average 5.9% between 2010-2013.