Bosnia-Herzegovina Infrastructure Report Q4 2009

There have been no major developments in Bosnia's infrastructure over the last quarter. Multilateral institutions such as the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB) continue to play a pivotal role in financing infrastructure projects in Bosnia, especially since the departure of infrastructure and energy majors from the country over 2009. Approval for loans from the EBRD is currently being sought for major projects in the transport sector(Sarajevo Airport, Sarajevo Bypass, Pan-European Corridors), and we expect those projects to dominate the sector in the remainder of 2009 and 2010.

Preliminary data for 2008 show stronger growth that we had estimated for the industry. We were estimating industry value at BAM1.18bn (US$865mn), but preliminary figures show that industry value reached BAM1.34bn (US$978mn). Accordingly, real industry growth was 23.4%. This makes the 2009 fall we are forecasting in industry value appear all the more abrupt, even though our forecast for the value has in fact changed marginally upwards from BAM1.12bn (US$760mn) to BAM1.14 (US$780mn). In BMI's Q409 Bosnia Infrastructure Report we forecast the industry value real growth will fall into negative territory for 2009 - in line with the contraction of wider economic activity - to -16.6% .

Bosnia's score in the regional Business Environment ratings has fallen even further this quarter. We no longer see an upside to the country's score from the entry of more foreign players in the market; on the contrary, the withdrawal of CEZ and the postponement of Strabag's highway project lower our expectations. The overall score is symptomatic of this very low industry value - below US$1bn. But more importantly, it is symptomatic of structural deficiencies in the overall investment climate and institutional infrastructure. These deficiencies are much more worrisome hurdles for the development of Bosnia's infrastructure than the low industry value and sector growth scores, and will therefore be much more detrimental for Bosnia's business environment score over the long term.

In BMI's Project Finance Ratings for Central and Eastern Europe, Bosnia ranks in 16th place out of 16 countries. Bosnia's score has seen the most significant decline (along with the Baltics) this quarter, reflective of the deteriorating expectations for financial and exchange rate stability that in turn jeopardise the long-term value of revenues of a project. The initial phases of design and construction contain high levels of risk for sponsors and investors, and Bosnia presents a remarkably low score for the commissioning and operating phase of a project. This indicates long-term risks, including price risk due to weak regulatory oversight and demand risk arising from high vulnerability to external financial and economic shocks.