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Bosnia-Herzegovina Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 35 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. With few signs that radical change can be implemented, we expect the country to muddle through in the coming years, with frustrating delays to badly needed reforms. The economic recovery that began with earnest in 2013 faces an important, albeit temporary, setback after historic flooding in May 2014 caused massive damage to property and infrastructure. Notwithstanding uncertainty over the rate at which reconstruction programmes can be completed, we expect the economic climate to improve again from 2015.

Budget policy will continue to be guided by the government's Stand-By Agreement with the IMF – which we expect to be extended beyond June 2015 – though budget execution will still be affected by political disputes.

Major Forecast Changes
We have adjusted our forecast for GDP growth in 2014 to 0.2%, from a previous 2.0%, as massive flooding in May hits the industrial and agricultural sectors hard, damaging export sales and causing a temporary reduction in domestic demand. We have lowered our forecast for annual average inflation in 2014 to 0.3%, from a previous 1.1%, as the deflationary trend persisted throughout H114. After coming in at an estimated 5.5% of GDP in 2013, we have increased our 2014 forecast for the current account deficit to 7.3%
of GDP (from a previous 5.8%) on account of reduced export growth in the aftermath of flooding. We have also raised our 2015 forecast to 7.3% of GDP.

Table Of Contents

Bosnia-Herzegovina Business Forecast Report Q4 2014
Executive Summary 5
Core Views...5
Major Forecast Changes.5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics 8
Elections No Cure For Dysfunctional System.8
With less than three months until the country's general election, political instability remains high in Bosnia-Herzegovina, with uncertainty
over the post-election scenario clouding the country's outlook. More significantly, we expect Bosnia's structural political problems to
continue to weigh on stability and economic development in the medium term.
Table: Political Overview8
Long-Term Political Outlook. 10
Unity To Prove Elusive Over Next Decade10
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
Widespread Flooding Impacts Growth Outlook.16
We have lowered our forecast for GDP growth in Bosnia-Herzegovina in 2014 to 0.2%, from a previous 2.1%, as the worst flooding in
over a century is likely to have derailed the economic recovery, hitting agriculture and exports hard. With the full extent of the flood costs
still not known, we note considerable risks to our near-term forecasts.
Table: Economic Activity16
Balance Of Payments .. 18
Export Sector Will Bear Brunt Of Flood Damage....18
Given the impact of widespread flooding on trade, we now expect the current account deficit for Bosnia-Herzegovina to widen to 7.3
%of GDP in 2014, from 5.5% in 2013. We anticipate that the shortfall will shrink again gradually from 2015, though we note considerable
risks to our short-term outlook given uncertainty over the full impact of the disaster.
Table: Balance Of Payments...18
Monetary Policy.. 19
Further Forecast Downgrades As Deflation Continues....19
The deflationary trend that began in Bosnia-Herzegovina H213 continued during the first half of 2014, prompting us to lower our
target for average inflation for the year to just 0.3% (from 1.1%). Significantly reduced output of food because of flooding and new
excise duties should generate some inflationary pressures in H214, though we continue to attach downside risks to our core view of
accelerating inflation in the coming years.
Table: Monetary Policy..20
Fiscal Policy .. 20
Flood Response To Derail Fiscal Consolidation20
Bosnia-Herzegovina's efforts at fiscal consolidation will take a major hit as massive flooding will reduces tax revenues and forces
increased spending in the short term. The increased outlays and borrowing will put greater restraints on government expenditure going
forward, especially as we expect the IMF to remain an anchor for fiscal policy in the coming years. Uncertainty over the full economic
impact of the floods and the post-electoral political climate is the key risk to our core outlook.
Table: Fiscal Policy21
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 2023, 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
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS....26
TABLE: BMI LEGAL FRAMEWORK RATING....27
Infrastructure. 28
TABLE: LABOUR FORCE QUALITY..28
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS....29
Market Orientation... 30
TABLE: TRADE AND INVESTMENT RATINGS30
TABLE: Top Export Desti nati ons (USDmn)31
Operational Risk. 32
Chapter 5: BMI Global Assumptions. 33
Global Outlook.... 33
US Revision Drags Down Forecast.33
Table: Global Assumptions33
Table: Developed States, Real GDP GrowtH, %..34
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 34
Table: Emerging Markets, Real GDP Growth, %.35

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