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Bosnia-Herzegovina Business Forecast Report Q1 2015

  • November 2014
  • -
  • Business Monitor International
  • -
  • 36 pages

Core Views

The results of the October 12 election provide little optimism for a change in Bosnia’s dysfunctional political system, especially as hard line parties representing each of the three constituent peoples made strong gains. With few signs that radical improvements are forthcoming, 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 caused massive damage to property and infrastructure. The domestic problem will be compounded by a regional slowdown, especially among Bosnia’s key trading partners.
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 target for GDP growth in 2015 to 1.6%, from a previous 2.5%, as political uncertainty following the election weighs on investment activity and regional headwinds restrict export growth. We have lowered our target for annual average inflation in 2014 to -0.8%, from a previous 0.3%, as the deflationary trend persisted throughout the first three quarters of the year. We have also lowered our inflation target for 2015 to 1.5%, from a previous 1.8%.
After coming in at a revised 5.9% of GDP in 2013, we have increased our target for the current account deficit to 7.9% of GDP in 2014 on account of reduced export growth in the aftermath of flooding. We have also raised our 2015 forecast to 8.2% of GDP, from a previous 7.3%.

Table Of Contents

Bosnia-Herzegovina Business Forecast Report Q1 2015
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 Index 7
Domestic Politics 8
Election Results Point To More Of The Same 8
The October 12 election results suggest little in the way of change for Bosnia-Herzegovina's convoluted political system, especially as
more hard line nationalist parties made the strongest gains overall. We expect structural deficiencies and ethnic divisions to continue to
hamper policy making at a crucial period for the economy, while also weighing on political stability going forward.
Tab le: Politica l Over view 8
Long-Term Political Outlook 10
Unity To Prove Elusive Over Next Decade 10
Tensions between ethnic groups will continue to undermine Bosnia'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 Index 15
Economic Activity I 16
Regional Headwinds Further Dampen Growth Outlook 16
GDP growth in Bosnia-Herzegovina contracted by 1.2% y-o-y in Q214 due to the cost of massive flooding in May. We retain out growth
target for full-year 2014 at 0.2% but have lowered our forecast for 2015 to 1.6% on account of political instability and an increasingly
bleak outlook among the country's major trading partners.
Table: Economic Activity 16
Economic Activity II 18
Unemployment To Remain High 18
Latest data from the labour market show that Bosnia-Herzegovina continues to suffer from chronic unemployment, with a rate of 27.5
%and few signs of structural reforms required to boost job creation. As a result, low wage growth, a large grey economy, and a brain drain
problem are likely to remain features of the local economy over the medium-term forecast period.
Balance Of Payments 19
Wider Deficits On Weaker Regional Demand 19
A worsening short-term outlook for exports will lead to wider current account deficits in the coming years. We forecast a deficit of 7.9
%in 2014, rising to 8.2% in 2015, as reduced economic activity following summer floods, combined with weakening demand in key trading
partners, will subdue export growth. With the current account set to remain in deficit over the ten-year forecast period, drawing in more
foreign direct investment will be crucial to boost long-term productivity and export growth.
Table: Balance Of Payments 19
Monetary Policy 20
Price Pressures To Remain Subdued in 2015 20
There are finally signs of returning price pressures after a prolonged period of deflation in Bosnia. Nevertheless, we have lowered our
average inflation targets for 2015 and 2016 in line with our more cautious view on the short-term economic recovery and our forecast for
softer international commodity prices ahead.
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 2023, we nevertheless maintain a relatively sanguine
outlook on the country's fundamental growth prospects.
Table: Long-Term Macroeconomic Forecasts 23
Chapter 4: Operational Risk 25
SWOT Analysis 25
Operational Risk Index 25
Operational Risk 26
Table: Operational Risk Index 26
Transport Network 27
Economic Openness 30
Table: Europe - Economic Openness 31
Table: Top Five Product Imports (USDmn) 32
Table: Top Five Export Trade Partners (USDmn) 33
Chapter 5: BMI Global Assumptions 35
Global Outlook 35
Reality Check: Uncertainty Reigns 35
Table: Global Assumptions 35
Tab le: Developed States , Rea l GDP Growt H, % 36
Tab le: Emerging Mar kets , Rea l GDP Growth , % 37

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