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Bosnia-Herzegovina Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 34 pages

Core Views

The domestic political environment remains heavily divided along ethnic lines, stunting structural reform and weighing on the country's EU membership ambitions. Increased international pressure may push the government to approve some long-delayed reforms, but progress is set to remain slow.

Although the preliminary estimate for 2013 real GDP growth exceeded expectations by coming in at 2.1% (subject to revisions), we maintain our forecast for 2.1% real GDP growth in 2014 as political uncertainty and high unemployment weigh on economic activity in this election year. We expect growth to accelerate to over 3% by 2016. Budget policy will continue to be guided by the government's Stand-By Arrangement with the IMF, though budget execution will still be affected by political disputes.

Major Forecast Changes

We have lowered our projection for annual average inflation in 2014 to 1.1%, from a previous 1.4%, after deflation continued through Q114. After coming in at an estimated 5.5% of GDP in 2013, we have increased our forecast for the 2014 current account deficit to 5.8% of GDP (from a previous 5.6%).

Table Of Contents

Bosnia-Herzegovina Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Major Forecast Changes ..5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics 8
Political Instability To Rise Ahead Of October Election ..8
Political instability will remain high in the run-up to October's elections, with ongoing unrest in the Federation of Bosnia and Herzegovina
and hardening secessionist talk from Republika Srpska being key areas of concern. Uncertainty over the post-election composition of
the entity and state-level governments, alongside the threat of a prolonged period of coalition forming, generate risks of further delays
in implementing much-needed reforms. This will continue to threaten Bosnia's planned integration into the EU and NATO.
table: Political Overview .8
Long-Term Political Outlook .. 10
Unity To Prove Elusive Over Next Decade .10
Tensions between ethnic groups in Bosnia will continue to weigh on the country's EU accession prospects, development potential
and risk profile through the next decade, with a number of issues having the potential to result in a further deterioration in the political
situation. That said, we expect the international community to remain firmly committed to Bosnia, which should prevent a relapse into
large-scale armed conflict.
Chapter 2: Economic Outlook . 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
Exports To Drive Economic Recovery .16
Preliminary figures show real GDP growth in Bosnia-Herzegovina of 2.1% in 2013, far above consensus expectations, as exports
soared on the back of a strong rebound in agriculture, manufacturing and energy production. We expect the rate of growth to stabilise
and hold our forecast for real GDP growth of 2.1% in 2014, rising to 2.7% in 2015. Political instability remains the key risk to our core
economic outlook.
Table: Economic Activity .16
Balance Of Payments . 18
Current Account To Stabilise As Imports Recover ..18
After shrinking dramatically in 2013, we expect Bosnia-Herzegovina's current account deficit to stabilise in 2014 as import demand rises
on accelerating economic activity. We forecast the shortfall to expand to 5.8% of GDP in 2014 (from 5.5% in 2013), and then gradually
narrow over the medium term, though we expect it to remain in the red over our forecast period to 2023.
table: Balance Of Payments 19
Increased Budget Risks As IMF Suspends Funding 19
Risks of disruption to fiscal policy in Bosnia-Herzegovina have increased markedly after the IMF suspended the sixth review of its
Stand-By Arrangement over the government's failure to implement changes to tobacco taxes. Delays to the release of IMF funds will
jeopardise some spending programmes, though we do not expect the deal to be cancelled altogether, with the IMF set to remain a key
player in the formation of domestic fiscal policy after October's elections.
table: Fiscal Policy ..20
Monetary Policy . 21
Persistent Deflation Prompts Forecast Adjustment 21
The lack of price pressure so far in 2014, and an expectation for moderation in commodity prices during the year, has prompted us
to revise our average inflation forecast for 2014 to 1.1%, from a previous 1.4%. We still forecast a return to inflation in H214, though
acknowledge downside risks to this short-term outlook.
table: Monetary Policy 21
Chapter 3: 10-Year Forecast . 23
The Bosnian Economy To 2023 23
Political Tensions To Slow Economic Convergence ..23
Bosnia's economic and political convergence will continue to be hampered by underlying inter-ethnic tensions in the country. Over the
long term, divisions among the ethnic Serb, Croat and Bosnian political parties will continue to slow progress on a host of EU-related
reforms. That said, while we do not expect Sarajevo to obtain EU membership by 2022, we nevertheless maintain a relatively sanguine
outlook on the country's fundamental growth prospects.
table: Long-Term Macroeconomic Forecasts 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings .. 25
Business Environment Outlook 26
Institutions . 26
Infrastructure 28
Market Orientation . 30
TABLE: Top Export Destinations (USDmn ) .31
Operational Risk . 32
Chapter 5: BMI Global Assumptions .. 33
Global Outlook . 33
Growth Increasingly Polarised ..33
Table: Global Assumptions ..33
Table : Developed States , Real GDP Growt H, % 34
Table : Emerging Mar kets , Real GDP Growth , % ..35

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