S&P raises Bosnia’s outlook for the first time since 2012

S&P raises Bosnia’s outlook for the first time since 2012
By Denitsa Koseva in Sofia March 13, 2019

Standard & Poor’s said it has upgraded Bosnia & Herzegovina’s outlook to positive from stable, leaving the B rating unchanged – the first improvement of the country’s outlook since 2012.

Bosnia’s economy was badly damaged by the bloody 1992-1995 war. Despite catching up after the end of the war, the country is still suffering due to constant political tensions, lack of reforms and lack of political will for improvement.

However, in the past few years international institutions have noted that, despite the constant political crisis, the country has become more resilient and the economy is picking up. Moreover, despite the significant delays, Bosnia is advancing in its path towards EU official candidate status, which could give another serious boost of the economy.

“The positive outlook reflects our view that, should a government be formed during the course of 2019, BiH's economic prospects could improve beyond our current base-case projections,” S&P noted.

Bosnia held general election in October last year, but so far political parties have failed to form ruling majority at state-level and in the Muslim-Croat Federation. Talks between the main nationalist parties are underway.

S&P added that the Bosnian authorities are expected to bring the country back to its frozen deal with the IMF, which, in turn, would lead to more reforms and would unlock financing for important infrastructure projects.

“The economy has appeared to be more resistant to political tensions than assumed,” Raiffeisen Bank also noted following the upgrade.

S&P agreed and noted that Bosnia’s economy can navigate through the current period of political uncertainty while still posting average annual GDP growth of just under 3%. The rating agency has projected the GDP growth at 2.8% in 2019 and expects it to speed to 2.9% in each of the next two years, improving further to 3% in 2022.

“At the same time, were this uncertainty to be removed by the formation of a government committed to renewing the IMF program, we think that growth performance would be boosted over the medium term, as positive confidence effects and better access to concessional financing would support infrastructure projects and private sector capital expenditure,” the rating agency noted.

Most international institutions expect that Bosnia’s economic growth will accelerate to 3.5% in 2019 from an estimated 3% in 2018. According to the European Bank for Reconstruction and Development (EBRD), investment in public roads is expected to play a more growth-supportive role in the coming period, if the country carries out the necessary reforms and the political situation does not worsen.

Bosnia’s Directorate for Economic Planning has a slightly more positive projection for economic growth, which it expects to rise by an annual 3.6% in 2019 and 2020. Domestic demand, backed by the constantly falling unemployment level in Bosnia, is seen as the main driver of the economic growth.

S&P said its decision to improve the outlook was backed by Bosnia’s solid fiscal position, declining stocks of government debt, and the economy's steady growth prospects.

"The sovereign's moderate and predominantly concessional debt burden also benefits debt sustainability, underpinning the rating, together with our assessment that the sovereign will continue to operate a prudent fiscal policy, particularly during periods of constrained access to external financing,” S&P said.

According to S&P, Bosnia’s rating could be raised in the next 12 months if a lasting government is formed and structural reforms are launched.

At the same time, the rating is constrained by Bosnia’s complex institutional framework and sustained current account deficits that give rise to substantial external financing needs that weigh on Bosnia’s creditworthiness.

A further halt of the loan tranches by the IMF could also worsen the situation in Bosnia.

“Even though the postponement of the €38mn tranche will not significantly hurt BiH's fiscal situation, we see the IMF programme as an important anchor for the country's structural reform agenda, and its positive momentum enables BiH to access external financing for key infrastructure projects. As such, a prolonged postponement of the IMF programme could lead to overall negative external financing sentiment,” S&P noted.

However, the rating agency anticipates that, once a new government is formed, it will resume talks with the IMF and will take the necessary steps to unfreeze the loan deal.