Bosnia and Herzegovina Telecommunications Report Q3 2007

According to BMI's latest research on the telecoms sector of Bosnia & Herzegovina, the number of Bosnian mobile subscribers grew by 9% in 2006 and by 1.8% in Q107. Although these growth figures reflect slower growth than we had previously envisaged for 2006, we believe that mobile subscriber growth is alive and well, and can be expected to produce impressive results over the next few years; we predict that subscriber numbers will increase by 12.7% in 2007 and by 13.7% in 2008, helping to push penetration to nearly 60%. A number of factors can be expected to boost growth rates over the next few years; these include the introduction of national mobile roaming on August 1 2007, and moves by the second and third largest mobile operators - Mobilne Srpske and HT Mobilne Komunikacije respectively - to launch nationwide mobile services. The advancement of national mobile competition can be expected to challenge the current dominant position occupied by national incumbent operator BH Telecom. It is also expected to lead to more competitive prices and the introduction of new innovative services. BMI believes that these developments will also help reverse the stagnant growth which currently characterises the postpaid market segment.

In addition to the regulator's announcement that national mobile roaming would be introduced in August 2007, other major developments in the past three months include the news that Serbia's Telekom Serbia had completed the debut of its US$700mn syndicated loan needed to purchase its 65% stake in Telekom Srpske. A total of US$646mn was paid for the stake, roughly equal to one fifth of the Republic of Srpska's gross GDP. As noted in our previous update, Telekom Serbia plans to invest some EUR295mn in Telekom Srpske, including EUR165mn in mobile telephony and in the deployment of 3G network technologies.

Telekom Serbia's investment in Telekom Srpske, as well as the January 2007 merger between mobile operator HT Mobilne Komunikacije and fixed-line telco HT Mostar, appears to have prompted a response from BH Telecom, which faces the prospect of increased national completion in the near future; in July 2007, the incumbent signed two network expansion contracts with Ericsson Nikola Tesla and Siemens Austria. BMI believes that these recent investments are not only designed to help the company meet the new competitive threats posed by Telekom Srpske and HT Mostar, but are also intended to increase BH Telecom's own value pending its eventual privatisation.

Bosnia continues to sit at the bottom of our Business Environment Rankings table for Emerging Europe. This is partly due to the country's relatively low political and economic risk ratings, which have both seen slight changes since the last quarterly update. Economic concerns continue to focus on the slow speed of structural reform, as well as the impact of high unemployment on the country's economic development. The slightly higher political risk rating reflects the anticipated signing of a Stabilisation and Association Agreement (SAA) with the EU sometime later this year.