Bosnia and Herzegovina Business Forecast Report Q4 2009

Bosnia and Herzegovina Business Forecast Report Q4 2009

Sub-National Divisions To Hamper Policy Reform
Bosnia remains on track for a 3.0% contraction of real GDP in 2009, as FDI inflows, credit growth
and external demand all take a beating at the hands of the eurozone recession. Sizeable imbalances
in the banking sector will further impact the growth outlook, as the necessity of structural
correction forces the reining-in of consumer and business finance. Moreover, GDP growth is set to
remain sluggish in H110, although we forecast positive growth of 1.5% for full-year 2010 as external
demand and international lending start to recover in the second half of next year. Compounding
Bosnia’s economic problems will be the country’s fractious domestic political climate. With the two
sub-state entities remaining divided over fiscal reform and other intra-national disputes, Sarajevo’s
capacity for decisive policy reform will remain weighed down.
On July 8, the Executive Board of the IMF gave final approval to Bosnia-Herzegovina’s planned
Stand-By Arrangement (SBA), which is set to provide EUR1.2bn of emergency financial lending
over a 36-month period. Despite the Fund’s positive decision, however, we caution that there are
still substantial risks to the SBA’s successful dispersal. For the IMF’s fiscal requirements to be met,
the Muslim-Croat Federation must cut around EUR207.0mn, which represents a level of contraction
that will entail extreme public discomfort. Accordingly, while we do expect the SBA funding to begin
being dispersed in the relatively near future, we caution that there are still risks of further delays
in the short term. Moreover, we caution that the political consequences of the state government
forging ahead with the IMF deal in the face of public opposition could be serious, both for social
stability and for government popularity.
The Bosnian current account deficit came in at EUR156.6mn in Q109, down 58.2% y-o-y from
the EUR374.8mn shortfall recorded in Q108. This represents the smallest quarterly current account
deficit seen since Q107, and fits with our view for external asymmetries throughout much
of emerging Europe to correct swiftly over the medium term as foreign capital availability dries
up. We forecast Bosnia’s current account shortfall to narrow to 7.9% of GDP in 2009 and 5.3%
in 2010, from 14.9% in 2008. Meanwhile, the Bosnian consumer price index (CPI) contracted by
1.7% y-o-y in June, according to BMI calculations, following on from the 0.9% fall seen in May.
In light of these substantial price falls, we have revised down our end-2009 Bosnian CPI growth
forecast to 0.3% (we hold to our end-2010 target of 3.5%), and caution that risks are weighted to
the downside.
Croatia’s leading mass grocery retailer (MGR) Konzum has announced that it has secured a longterm
lease on 11 stores owned by Super Nova, a retail chain operating in Bosnia. The expansion
will increase Konzum’s presence in the country to over 90 outlets. The fact that Konzum leads
the Bosnian MGR sector with a market share below 15% highlights the fragmented state of the
industry. That said, given its strategy of rapid expansion, BMI believes Konzum is best placed
among Bosnia’s retailers to break the 20% market share barrier. We stress that Konzum’s expansion
is an encouraging sign of the development and maturation of Bosnia’s grocery market, and
of its increasing accessibility to foreign investors.

Executive Summary... 7
Sub-National Divisions To Hamper Policy Reform
Chapter 1: Political Outlook. 9
SWOT Analysis9
BMI Political Risk Ratings.. 10
Domestic Politics11
IMF Deal To Support Economy But Provoke Unrest
The IMF’s decision to approve provision of Bosnia-Herzegovina’s planned EUR1.20bn Stand-By Arrangement is a
positive development for the country’s macroeconomic stability, both as a source of badly-needed finance in its
own right, and as a reform-leaning policy anchor.
Table: Political Overview.. 12
Chapter 2: Economic Outlook. 15
SWOT Analysis.. 15
BMI Economic Risk Ratings.... 16
Economic Activity....17
Leading Indicators Confirm Recession
The Bosnian economy is on track for an extended period of weak output in the medium term, and we hold to our 2009
and 2010 real GDP growth forecasts of -3.0% and 1.5%, respectively.
Table: ECONOMIC ACTIVITY17
Banking Sector...19
Stresses To Prolong Recession
Stresses in the Bosnian banking system will continue to build through 2010, as ongoing deposit outflows and a marked
deterioration in asset quality amidst a severe recession reduce the sector’s profitability.
Balance of Payments....20
C/A Deficit To Halve Amid Financing Pressure
Bosnia’s current account deficit is set to fall to 7.9% of GDP in 2009 and 5.3% in 2010, from 14.9% in 2008, as a sharp
contraction of external capital availability forces a substantial correction of the trade imbalance.
Table: BALANCE OF PAYMENTS (Euro) 21
Monetary Policy..22
Inflation To Be Minimal Until Mid-2010
Bosnia is set to experience minimal inflation through the medium term as a result of weak aggregate demand, scarce
liquidity and the fixed currency board mechanism, and we have therefore cut our end-2009 CPI growth forecast to 0.3% y-o-y.
Table: MONETARY POLICY. 22
Exchange Rate Policy....24
Currency Board To Be Maintained
Bosnia is likely to maintain its currency board exchange rate mechanism fixed in the long term, with the convertible mark
set to remain at BAM1.9558/EUR through our five-year forecast period.
Table: EXCHANGE RATE 24
Chapter 3: 10-Year Forecast... 27
The Bosnian Economy To 2018...27
Political Tensions To Slow Economic Convergence
Bosnia’s economic and political convergence will continue to be hampered by underlying inter-ethnic tensions in the country.
Table: Long-Term Macroeconomic Forecasts.27
Chapter 4: Special Report.. 29
The Fate Of ‘Chindia’....29
Overview
Although China and India will continue to grow during the global recession of 2009-2010, they are not immune to
the downturn, and face a number of risks in the near term.
China And India SWOT...30
Chapter 5: Business Environment.... 37
SWOT Analysis...37
BMI Business Environment Risk Ratings.... 38
Business Environment Outlook...39
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS 40
Institutions ....41
TABLE: BMI LEGAL FRAMEWORK RATINGS 42
Infrastructure 43
Market Orientation ..45
Table: Europe, FDI Annual Inflows. 46
TABLE: BMI TRADE RATINGS....47
TABLE: TOP EXPORT DESTINATIONS.. 48
Operational Risk .48
Chapter 6: BMI Global Assumptions 51
Global Assumptions .51
table: GLO BAL ASSUMPTIONS.... 51
table: GLO BAL And REGIONAL REAL GDP GRO WTH.... 52