Country Risk Service Bosnia-Hercegovina September 2012 Updater

Country Risk Service Bosnia-Hercegovina September 2012 Updater

Overview

Political stability in Bosnia and Hercegovina (BiH) is set to become more precarious, as fresh disputes have followed the formation of a new central government in February 2012, after a 16-month deadlock. The Economist Intelligence Unit expects limited reforms, required for EU integration, to be agreed by the government of the prime minister, Vjekoslav Bevanda, but there will be delays because of a new government crisis. The international High Representative, Valentin Inzko, will try to promote further reforms before his post is abolished, probably by end-2013. Economic policy will focus on fiscal consolidation, while trying to encourage economic growth, and on the implementation of the stabilisation and association agreement (SAA) with the EU. The currency board will remain the cornerstone of monetary policy. We forecast that after a sluggish recovery in 2010-11 real GDP will contract by 0.2% in 2012 as the euro zone goes into recession, before accelerating to an annual average of 2.4% in 2013-16. The current-account deficit is forecast to shrink to an average of 6.7% of GDP in 2012-14, as import prices decline, and is then set to widen to an average of 7.5% in 2015-16.

Key changes from last month

Political outlook

Senior EU officials have criticised BiH's leaders for missing the August 31st deadline to agree amendments to the constitution, putting in doubt BiH's ability to submit a credible application for EU membership in 2012.

Economic policy outlook

The Federation parliament adopted a revised budget for 2012 on September 6th, clearing the way for approval of a US$500m stand-by arrangement by the IMF's board of directors. However, there is a risk that the BiH authorities will not meet all the conditions required for the loan's disbursement.

Economic forecast

Industrial output in July shrank by 3.9% year on year in the Federation and by 13.4% in the RS as demand in BiH's leading EU export markets weakened. The latest drop in industrial output supports our forecast that BiH is heading for a double-dip recession in 2012.

Please Note: Due to the Nature of This Report The Toc is Not Available