Bosnia and Herzegovina: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Upturn in activity sustained by consumption
In 2016, activity is expected to gradually pick up. The main driving force for this should be household consumption, which will feel the benefits of higher real incomes thanks to low inflation, as well as an upturn in remittances from expatriate workers. After suffering with floods during the last two years, there should be an increase in public investment. Whilst its infrastructures, in particular roads, will continue to benefit from funding from the European Bank for Reconstruction and Development as well as from the German development bank, Kreditanstalt für Wiederaufbau, private investment is likely to remain at a low level and continue to feel the effects of the unstable business climate and a rigid employment market. There should be moderate growth in exports given the weakness of the recovery in the European Union. These should benefit from the sustained demand in the German and Italian markets, although its exports, which include furniture, mineral fuels, distilled products and shoes, tend to be low added-value goods. The contribution from external trade to growth should however remain negative given the strength of imports boosted by consumption. The services sector should sustain growth in 2016 thanks to the performance of retail, information systems and financial services.
A gradual return to budgetary consolidation but an enduring current account deficit
Public accounts are likely to remain in slight deficit in 2016. The reduction of the budgetary deficit was made possible thanks to the consolidation plan completed in 2015, which included improvements in tax collection. In addition, a program of structural reforms aimed at achieving a balanced budget by 2017 is expected ahead of an eventual membership to the European Union.
The amount of public debt is unlikely to make a significant decline as a result of a decision by the IMF to suspend the payment of funds in the context of the Stand-By Arrangement, given the failings in governance. The budgetary consolidation has been hampered by institutional complexity and the dispersal of authority between the central State and the two Entities that constitute the Federation.
The current account deficit remains high as a result of rising imports caused by strong domestic demand. However, the worsening of the balance of trade deficit should be offset by the surplus in the balance of services and by the upturn in remittances, a reflection of the European economic situation. FDI will continue to increase at a moderate rate (as the EU is the main source and the economic recovery in the Eurozone is gradual). Its currency reserves are likely to hold at a comfortable level, equal to approximately 6 months’ imports.
A political situation marked by ethnic divisions and two coexisting governments
Following the Dayton Agreements in 1995, the Bosnian administration was split into two distinct autonomous entities: The federation of Bosnia-Herzegovina and the Serb republic of Bosnia. The State is headed by a collegial Presidency that is representative of the three "constitutive peoples" with an alternating presidency every 8 months. The Constitution grants only very limited powers to the central State, giving it responsibility for foreign, monetary and transport policy and defense. The complexity of public administration has created shortcomings in terms of governance and weakened the power of the central executive. The most recent elections held in October 2014 were won by nationalist parties. It did not prove possible to form a coalition government representing the three communities - Muslim Bosnians, Catholic Croatians and Orthodox Serbians - before March 2015, following a great deal of multiparty negotiation.
The next general elections covering both the central level and the two entities will be in October 2018, although there will be municipal elections in October 2016. These elections are likely to be a crucial test for the current governments, and should measure their successes in terms of the implementation of the reforms contained in the Stabilization and Association Pact, created in June 2015 in the lead up to EU membership.
The business climate will continue to suffer because of the political fragmentation and be constrained in a country in which the legal system operates poorly, with a high degree of corruption and a huge informal sector. The Doing Business report places the country in 79th position out of 189 countries in terms of the ease of doing business.