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Bosnia-Herzegovina Country Risk Report Q3 2016

  • May 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views Partisan manoeuvring, ethnic divisions and complex governing structures combine to make Bosnia-Herzegovina's political system largely dysfunctional. With few signs that radical improvements are forthcoming even after its application for EU membership, we expect the coming years to be tainted by frustrating delays to badly needed reforms. After outperforming in 2015, the economic recovery is set to continue in 2016 and beyond, driven largely by renewed growth in household consumption and to a lesser extent fixed investment. Chronic unemployment and an under-developed infrastructure will remain impediments to even faster growth, while increased global risks also pose a threat to the recovery.

Budget policy will continue to be guided by the IMF due to the government's reliance on external funding to cover its budget deficits. This should ensure short-term financial stability and fiscal discipline, though little has been done so far to address structural problems. After a prolonged period of deflation, we expect modest price pressures to return from H216, though inflation will remain subdued in the coming years. Major Forecast Changes We have raised our forecast for real GDP growth in 2016 to 2.9%, from 2.6% previously, due to stronger-than-expected growth in 2015. We have revised our forecast for the current account deficit in 2016 to 5.3%, from a previous 5.6%, due to the unexpected fall in the deficit in 2015. Our deficit forecast for 2017 is now 5.2% of GDP, due to the impact of lower commodity prices on the import bill, an improving outlook in some of Bosnia's major export markets, and growing revenues from tourism.

Table Of Contents

Bosnia-Herzegovina Country Risk Report Q3 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Solid Headline Growth Masks A Fragile Economy8
Preliminary figures show real GDP growth in Bosnia-Herzegovina exceeded expectations in 2015 by coming in above 30% We
forecast a similar rate of expansion in 2016, as a gradual pick-up in private consumption offsets fiscal consolidation and less favourable
external dynamics Bosnia's medium-term outlook remains clouded by elevated political risk and the precarious state of public
finances
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS9
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS 10
Fiscal Policy And Public Debt Outlook 10
IMF Deal Will Provide Short-Term Stability10
Fiscal policy will be anchored by the IMF, with which Bosnia is likely to secure a new financing deal to cover short-term deficits Though
reforms will move forward slowly, the country's complex political structure will continue to impede effective budget execution over the
medium term
Structural Fiscal Position 11
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES 11
Monetary Policy 12
Modest Return Of Price Pressures In H21612
Bosnia-Herzegovina's long run of deflation continued in Q116, but a recovery in commodity prices will bring the return of inflation in the
latter part of the year That said, domestic price pressures will remain moderate in the coming 12 months
Monetary Policy Framework 13
External Trade And Investment Outlook 14
Current Account Rebalancing Running Its Course14
After a sharp contraction in the trade deficit led to a dramatic fall in Bosnia-Herzegovina's current account shortfall to 57% of GDP in
2015, we expect the deficit to stabilise this year and beyond as import growth gradually catches up with exports A persistent external
deficit will require increase foreign investment inflows to minimise external vulnerabilities
Outlook On External Position 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 15
TABLE: TOP FIVE GOODS EXPORTS IN 2015 16
TABLE: TOP FIVE GOODS IMPORTS IN 2015 16
Chapter 2: 10-Year Forecast 17
The Bosnian Economy To 2025 17
Sluggish Reform Progress To Dent Long-Term Growth17
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 2025, we nevertheless maintain a relatively sanguine
outlook on the country's fundamental growth prospects
TABLE: LONG-TERM MACROECONOMIC FORECAST 17
Chapter 3: Political Outlook 19
SWOT Analysis 19
BMI Political Risk Index 19
Domestic Politics 20
Deep Divisions Will Continue To Weigh On Development20
Bosnia-Herzegovina's political system will remain structurally flawed, with ethnic divisions between the Bosniak (Muslim), Croat,
and Serb communities severely undermining efforts to promote national sovereignty Upcoming local elections, the outlying chance
of Republika Srpska (RS) attempting to secede, and the threat of Islamic radicalisation pose risks to political stability in the coming
year
TABLE: POLITICAL OVERVIEW 20
Long-Term Political Outlook 21
Unity Will Prove Elusive Over Next Decade21
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 4: Operational Risk 25
SWOT Analysis 25
Operational Risk Index 25
Operational Risk 26
TABLE: OPERATIONAL RISK 26
Economic Openness 27
TABLE: TOP 5 TRADE PARTNERS - PRODUCT IMPORTS (2014), USDMN 27
TABLE: FREE TRADE AGREEMENTS 28
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES 29
Availability Of Labour 33
TABLE: EMERGING EUROPE - AVAILABILITY OF LABOUR RISK 33
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Tentative Stability, But New Risks Emerging39
TABLE: GLOBAL ASSUMPTIONS 39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 41
TABLE: MACROECONOMIC DATA and FORECASTS 43

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