Country Risk Rating

A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high. - Source: Coface

Business Climate Rating

The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.


  • Regular growth
  • Significant transfers from expatriate workers
  • Stabilisation and Association Agreement with the EU with pre-accession funds
  • Tourism (11.7% of employment and 10.2% of GDP, directly and indirectly) and hydroelectric potential (already 35% of electricity produced)


  • Institutional, regulatory, economic and community fragmentation (50% Muslim Bosnians, 33% Orthodox Serbs and 15% Catholic Croats)
  • Lack of public investment (local transport, education, health) with only 2% of public expenditure
  • Low diversity and low added value of exports
  • Corruption, clientelism, administrative delays
  • High emigration estimated at 50,000 people per year
  • Large informal sector, low labor force participation (42%), high youth unemployment (34%)

Current Trends

Activity supported by domestic demand

Domestic demand will again underpin moderate growth in 2020. Household consumption will remain strong, driven by real wage increases, remittances from expatriates and growth in reported employment as a result of the decline in the informal sector and job creation across all sectors. Credit will grow strongly again (approximately +7% in 2019), with doubtful loans (8% of the outstanding amount) continuing to decline. The rise in tourism from neighboring countries will benefit the population through retail trade. Investment in infrastructure (roads, railways, energy) and agriculture, but also to improve the administrative and business environment, owes a great deal to funding from the EBRD (€700 million over 2018/2020, in partnership with the private sector) and the European Union (€315 million over 2018/2020), and could be accelerated if the IMF releases its credits. Less than one-third of the IMF’s Extended Credit Facility (USD 623 million for 2016/2019) has been disbursed so far. One of the conditions was met with the adoption of a reform program, but by the end of 2019, a central government and a Bosnian-Croat government had not yet been formed, even though the elections were held in October 2018. The value of investments on hold because of the political problems is estimated at €1 billion. Meanwhile, private investment, both domestic and foreign, will remain modest due to persistent institutional weaknesses and a poor business environment that will not be offset by low labor costs. The contribution of trade to growth is expected to be zero. Exports of ore (coal, corundum, and carbonates), wood, aluminum, furniture, machinery, electrical cables, metal parts and footwear may be affected by weakness in their main markets and pressure on prices, while imports will be supported by domestic demand. That said, agri-food and electricity sales are benefiting from the expansion of trade with the EU.

Balanced public accounts, but a current account deficit

Overall, the public accounts of the country’s three constituent entities (the central government, the Bosnian-Croat Federation and the Serb Republic) are expected to remain balanced in 2020. However, in the absence of a budget since 2019, due to blocking by the Serbian co-President, the central government is operating based on the 2018 budget. It is largely financed by a share of VAT income (40% of the country’s tax earnings), which increases in line with activity. Expenses are contained. A balanced budget and moderate growth will be sufficient to reduce the burden represented by the country’s modest debt, 74% of which is held by external creditors, mainly public, multilateral or bilateral. Debt is divided between the Bosnian-Croat Federation (52%) and the Serb Republic (47%), but given the respective GDPs, the latter has a higher debt-to-GDP ratio. While the public accounts appear to be in acceptable shape, the way that their management is fragmented between the central government and the other two entities, the future cost of pension and health systems, and poor governance at the country’s around 500 state-owned companies, half of which survive thanks to public aid, may lead to some nasty surprises.

In 2020, the current account deficit could widen under the influence of the trade deficit (23% of GDP in 2019). Expatriate remittances (8%), pensions from abroad (4%) and the surplus in services (7%) related to tourism, transport and outward processing will, as usual, partially offset the trade deficit. FDI (3% of GDP) and international financing, mainly from public sources, will make it possible to balance the balance of payments, while maintaining foreign exchange reserves at a level equivalent to 7.5 months of imports.

Institutions held hostage to community allegiances

The 1995 Dayton Agreements divided Bosnia and Herzegovina into two autonomous entities: the Bosnian-Croat Federation of Bosnia and Herzegovina and the Bosnian Serb Republic, plus the district of BrĨko, which is managed by the central government. The central government is led by a collegial presidency representing the three “constituent peoples”, which rotates every 8 months. The constitution assigns very few powers to the central government, which is responsible for foreign and monetary policy, customs duties, VAT, transport and defense. Even these powers are difficult to manage, as each component has blocking powers within the central parliament. Bosnians are trying to strengthen the central government, Croats want autonomy, while Serbs question the country’s very existence. The presidential and legislative elections of October 2018 again played out along ethnic lines, putting nationalist parties in charge. The presidency must appoint the council of ministers, but the Croatian and Bosnian members are making the appointment of one of their Serbian colleague’s candidates conditional on his agreement to build ties to NATO, which he has refused to give on the grounds of Serbian neutrality. In return, Serbs are blocking the central parliament. A central government may be formed in 2020, perhaps before the October municipal elections. For now, management has been entrusted to a caretaker government led by the Speaker of the House of Representatives. Nevertheless, in November 2019, the Serb Republic and the Bosnian-Croat Federation agreed on a four-year reform program, which is a prerequisite for applying for EU candidate status and resuming relations with the IMF.


Coface (02/2020)
Bosnia and Herzegovina