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Bosnia-Herzegovina Country Risk Report Q2 2016

  • February 2016
  • -
  • Business Monitor International
  • -
  • 35 pages

Core Views

Partisan manoeuvring, ethnic divisions and complex governingstructures combine to make Bosnia & Herzegovina's political systemlargely dysfunctional. With few signs that radical improvements areforthcoming – even with the country's imminent EU membershipapplication – we expect the country to muddle through in the comingyears, with frustrating delays to badly needed reforms.The economic recovery is set to accelerate in 2016 and beyond,driven largely by household consumption and, to a lesser extent,fixed investment. Chronic unemployment and underdeveloped infrastructurewill remain impediments to faster growth, while increasedglobal risks also pose a threat to the recovery.

Budget policy will continue to be guided by the IMF due to the government'sreliance on external funding to cover its budget deficits.This should ensure fiscal discipline, though has so far done little toaddress structural problems.Political risks and business environment deficiencies will continueto weigh on foreign direct investment inflows, which are needed tocover the relatively wide current account shortfall.Major Forecast ChangesWe have lowered our short-term forecast for real GDP growth in2016 to 2.6%, from a previous 2.8%, due to global headwinds andthe impact of the EU removing preferential trade tariffs for Bosnia'sagricultural goods.

We have adjusted our forecast for the current account deficit in 2016to 5.3%, from a previous 7.1%, due to the impact of lower commodityprices on the import bill, an improving outlook in some of Bosnia'smajor export markets and growing revenues from tourism.Sustained weakness in oil prices ensured another full year of deflationin 2015, and this dynamic looks set to continue in the coming months.As such, we have revised down our average inflation forecast for2016 to 0.3%, from a previous 1.0%. We also have revised downour inflation forecasts over the medium term.

Table Of Contents

Bosnia-Herzegovina Country Risk Report Q2 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
Growth To Accelerate, But Threats Remain8
Our core view remains that growth in Bosnia and Herzegovina will accelerate in the coming years due to growing consumer confidence
and export demand for manufactured goods Internal structural problems and increased global headwinds pose a threat to the country's
growth outlook
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS9
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
External Trade And Investment Outlook 10
Current Account Deficit Falling on Subdued Import Growth10
Bosnia and Herzegovina's external position is expected to improve in 2016, largely due to lower prices of commodity imports The current
account deficit will remain relatively high in the medium term, though we expect to see increased foreign investment and income in the
fast-growing tourism sector
Outlook On External Position 11
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE12
TABLE: TOP FIVE GOODS EXPORTS IN 201412
TABLE: TOP FIVE GOODS IMPORTS IN 201412
Monetary Policy 13
Near Zero Inflation To Persist Until 201713
We have lowered our forecast for inflation in 2016 to 03%, from a previous 10%, as falling oil costs, increased crop production and
minimal wage growth keep price pressure at bay
Monetary Policy Framework 14
Fiscal Policy And Public Debt Outlook 15
New IMF Deal Crucial For Fiscal Stability15
Fiscal policy in Bosnia and Herzegovina will continue to be influenced by external bodies - especially the IMF - due to a reliance on
funding to cover persistent budget gaps We expect a new IMF loan deal this year, and forecast the budget deficit will narrow gradually
from an estimated 23% of GDP in 2015
Structural Fiscal Position 15
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES16
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
TABLE: LONG-TERM MACROECONOMIC FORECASTS 17
Chapter 3: Political Outlook 19
SWOT Analysis 19
BMI Political Risk Index 19
Domestic Politics 20
EU Accession Highly Unlikely In Coming Decade20
Bosnia and Herzegovina's imminent application for EU membership is a symbolic step forward but is unlikely to have a meaningful impact
on the country's unwieldy political system Political risk will remain high, with a referendum in the Republika Srpska entity a potential
flashpoint for trouble this year
TABLE: POLITICAL OVERVIEW20
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 RISK26
Trade Procedures And Governance 27
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 27
TABLE: EXPORT AND IMPORT DOCUMENTS28
TABLE: TRADE PROCEDURES BREAKDOWN28
Vulnerability To Crime 28
Chapter 5: BMI Global Macro Outlook 31
Global Macro Outlook 31
Downside Risks Gather Momentum31
TABLE: GLOBAL ASSUMPTIONS31
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %32
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 32
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %33
TABLE: MACROECONOMIC DATA and FORECASTS 35

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