Country Report Bosnia-Hercegovina December 2008

Outlook for 2009-10

• The local elections in October 2008 have reinforced the positions of the leading political parties representing the three main ethnic communities of Bosnia and Hercegovina (BiH), and this may lead to a government reshuffle.
• The parties that have gained ground in the elections have shown willingness to agree constitutional amendments and other reforms, which, if implemented, would help to facilitate BiH's integration with the EU.
• BiH is unlikely to recognise the independence of Kosovo, as this would create another source of internal division and increase the risk of Republika Srpska (RS) pushing for secession from BiH.
• There is a risk of further delays in structural reform and privatisation. The currency board arrangement will remain the cornerstone of macroeconomic stability.
• The Economist Intelligence Unit forecasts a slowdown in real GDP growth to an annual average of 3.5% in 2009-10, reflecting an expectation of tighter macroeconomic policies and a downturn in BiH's euro zone export markets.
• We expect a current-account deficit of 17.2% of GDP in 2008 to be followed by a contraction to an average of around 15% of GDP in 2009-10, as falling global oil prices and slowdown in import demand help BiH's balance of payments.

Monthly review

• BiH's three main ethnically based political parties have restarted talks on constitutional amendments and other reforms that are required to facilitate their country's integration with the EU.
• The three-party deal has been denounced by several other political parties, and has raised tensions within the ruling coalitions at state and entity levels.
• The RS assembly has approved the entity's 2009 budget, aiming for a surplus of 1.5% of GDP, and envisaging public-sector salary cuts that could fuel social discontent as economic growth slows.
• Industrial output increased by more than 7% year on year in January-October, amid the first indications of cuts in steel and aluminium output in response to weaker demand in BiH's export markets.
• The consumer price index (CPI) increased by 0.7% month on month in October, following higher energy tariffs, but for January-October average annual inflation dropped to 8%, from 8.1% in January-September.
• BiH's merchandise trade gap amounted to KM8.1bn (US$6.2bn) in January-October 2008. This represented an increase of 34.7% compared with the same period in 2007, highlighting BiH's deteriorating international competitiveness.

Source: Country Report