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Here is another interesting view of Bosnia's economy:
March 28 -
Overview
-- In our opinion, legal ambiguity over the extension of temporary financing into 2012 led to delayed foreign currency debt repayments by the central government of Bosnia and Herzegovina to a number of official creditors in January 2012.
-- However, the formation of a state coalition government on Feb. 10, 2012, 16 months after the general elections, has brought some stability to the political environment.
-- The new government has adopted the 2011 budget, which helps extend temporary financing into 2012 and facilitates external-debt servicing. It has also adopted a 2012-2014 global fiscal framework--a key prerequisite for adopting a 2012 budget and the basis for an official request for IMF assistance.
-- We are therefore removing our 'B/B' long- and short-term foreign and local currency sovereign credit ratings on Bosnia and Herzegovina from CreditWatch with negative implications, where they were placed on Nov. 30, 2011, and affirming the ratings.
-- The outlook on the long-term ratings is stable, reflecting our expectation that the political environment will stabilize now that a government is in place, enabling more effective management of public finances alongside the likely involvement of the IMF.
Rating Action
On March 28, 2012, Standard & Poor's Ratings Services affirmed its 'B/B' long- and short-term foreign and local currency sovereign credit ratings on Bosnia and Herzegovina. At the same time, we removed the ratings from CreditWatch with negative implications, where they were placed on Nov. 30, 2011. The outlook is stable.
The transfer & convertibility (T&C) assessment for Bosnia and Herzegovina remains at 'BB-'.
Rationale
The affirmation of the ratings on Bosnia and Herzegovina and removal of the ratings from CreditWatch negative reflect our opinion of a more stable political and fiscal outlook following:
-- The formation of a central government;
-- The adoption of a 2011 budget; and
-- The adoption of a global fiscal framework that will likely pave the way for renegotiating an IMF program, as well as expected disbursements from other official creditors such as the EU.
In our opinion, however, short-term challenges remain. While the government has made significant progress toward adopting a 2012 budget, it remains on temporary financing nearly 15 months after the elections. This constrains the state's fiscal policy flexibility. Political uncertainty remains a risk if the government fails to resolve sensitive issues such as pension payments for war veterans, who have recently started a hunger strike.
Longer-term challenges, such as the resumption and implementation of the reform agenda, EU candidacy, NATO membership, and the reduction of public-sector spending, will likely highlight tensions between the Federation of Bosnia and Herzegovina and Republika Srpska (the entities) and state-level institutions. Tensions may also arise between and within the entities themselves. In our view, the economic environment could compound these difficulties. We expect Bosnia and Herzegovina's economy will stay flat in 2012 as external demand from key European trading partners remains subdued and domestic demand remains fragile. Given the large presence of Austrian and Italian banks in Bosnia and Herzegovina, we expect that credit conditions will remain tight. External debt will likely increase as domestic companies seek credit from foreign sources.
Between October 2010 and February 2012, Bosnia and Herzegovina was without a formal state government. Disputes over the role, legitimacy, and funding of state institutions and ongoing inter-entity disagreements over the appointment of a prime minister contributed to what we view as significant and protracted political uncertainty (see "Ratings On Bosnia and Herzegovina Lowered To 'B/B' And Placed On Watch Negative On Deteriorating Political Environment," published on Nov. 30, 2011). Although a state government was not a prerequisite for adopting a medium-term fiscal framework or an annual budget for 2011 or 2012, the interim administration implemented neither. As a result, the state has been relying on temporary financing for nearly 15 months, the effects of which will likely weigh on the economy during 2012. Moreover, because a 2011 budget was not adopted before the end of that calendar year, political circumstances and ambiguity over the legality of extending the temporary financing arrangement (based on the previous year's budget) into 2012 saw some minor delays to official creditor payments in January 2012. We note that these are now fully paid.
Parliamentary approval of a new prime minister in January paved the way for the formation of a coalition government, which has since adopted a 2011 budget. This has ensured that temporary financing can continue into 2012, based on the newly adopted 2011 budget, allowing for the servicing of all debt. The government has also agreed on a 2012-2014 fiscal framework, a prerequisite for adopting a 2012 budget. As a result, we do not expect the political circumstances that led to January's delayed payments will resurface, and so we view the short-term financing environment as more stable.
Now that it has adopted a fiscal framework, the government has formally approached the IMF. A previous stand-by agreement stopped disbursing in November 2010 because of the inconclusive general elections and there being no 2011 budget. In our opinion, a renegotiated IMF program would likely add stability to economic policies and management.
The new government has also shown signs of re-establishing EU candidacy as a policy priority; it has adopted long-awaited legislation on a state census and the law on state aid. We understand that the government plans to apply for EU membership by mid-year. However, implementation risks exist in the form of longstanding inter-entity disagreements over state institutions and their financing, including repeated calls from Republika Srpska for devolved power as well as disagreements within the Federation. We view these risks as a ratings weakness.
Outlook
The stable outlook reflects our expectation that the political environment will stabilize now that a state government is in place, enabling more effective management of public finances alongside the likely involvement of the IMF. However, we continue to expect delays to the adoption and implementation of important measures such as a 2012 budget and a planned 2013 census; such delays may intermittently impair policy continuity and growth prospects. We also expect that sensitive issues related to government expenditure and the role of the international community will continue to be divisive.
We could lower the ratings if it appears that the adoption of a 2012 budget will face substantial delays. If we see delays to the timely servicing of debt, as happened in January this year, we could lower the ratings by more than one notch. Additionally, further deterioration in the external environment would weigh on growth and could put pressure on the banking system, where ownership is dominated by Austrian and Italian banks, and could also lead us to lower the ratings.
If inter-entity tensions abate, and the entities' relationship with state institutions improves--enabling significant progress toward EU accession--we could raise the ratings. However, we view this as unlikely over the next few years.
Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Criteria For Determining Transfer And Convertibility Assessments, May 19, 2009
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
Bosnia and Herzegovina
Sovereign Credit Rating B/Stable/B B/Watch Neg/B
Transfer & Convertibility Assessment BB-
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